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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report:
November 11, 2004
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(Date of earliest event reported)
RAYOVAC CORPORATION
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(Exact Name of Registrant as Specified in Charter)
Wisconsin 001-13615 22-2423556
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(State or other Jurisdiction of (Commission (IRS Employer
Incorporation) File No.) Identification No.)
Six Concourse Parkway, Suite 3300, Atlanta, Georgia 30328
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(Address of principal executive offices, including zip code)
(770) 829-6200
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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)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the Registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
(a) The following information, including the Exhibit attached hereto,
is being furnished pursuant to this Item 2.02 and 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.
On November 11, 2004, Rayovac Corporation conducted a webcast discussing its
estimated financial results for its fourth fiscal quarter, and fiscal year,
ending September 30, 2004. A transcript of the webcast is furnished as Exhibit
99.1 to this report.
Item 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(c) 99.1 Transcript of webcast conducted by
Rayovac Corporation on November 11, 2004.
SIGNATURES
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.
Date: November 15, 2004 RAYOVAC CORPORATION
By: /s/ Randall J. Steward
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Name: Randall J. Steward
Title: Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Description
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99.1 Transcript of webcast conducted by Rayovac Corporation
on November 11, 2004.
EXHIBIT 99.1
RAYOVAC CORPORATION
MODERATOR: KENT HUSSEY
NOVEMBER 11, 2004
7:30 AM CT
Operator: Ladies and gentlemen, thank you for standing by.
Welcome to the Rayovac's Fourth Quarter and Fiscal 2004
Earnings Conference Call.
During the presentation all participants will be in a
listen-only mode. Afterwards we will conduct a question
and answer session. At that time if you have a question,
please press the star then the number 1 on your telephone.
If you would like to withdraw your question, press the
star and the number 2 on your telephone.
As a reminder, this conference is being recorded today,
Thursday, November 11.
I would now like to turn the conference over to Mr. Kent
Hussey.
Please go ahead, sir.
Kent Hussey: Well good morning, everybody. Thank you for joining us.
With me today as always, Dave Jones, our CEO; Randy
Steward, our CFO; and Nancy O'Donnell, our VP of Investor
Relations.
As is our custom, Dave and I will have some prepared
remarks for you and then allow hopefully sufficient time
for your questions and answers.
However, first, Nancy will read our Safe Harbor Statement.
Nancy O'Donnell: Good morning.
We will be making forward-looking statements in our
remarks today. These forward-looking statements are based
on management's best estimates, assumptions and
projections as of today. They're subject to certain risks
and uncertainties that could 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, or our ability to successfully
implement manufacturing and distribution cost efficiencies
and improvements, as well as various other factors.
Some of these risk factors will be discussed today, others
are discussed in our securities filings, and we refer you
to our most recent Form 10-Q and Annual Report on Form
10-K for more detail. Rayovac assumes no obligation to
update the forward-looking statements we make today.
And another administrative matter, let me point out that
we will also be discussing pro-forma numbers on today's
call. These pro-forma numbers represent operating results
of continuing operations excluding restructuring and
certain other costs. We've provided a financial schedule
in our press release labeled Table 3, which reconciles the
pro-forma numbers to our GAAP financial results. This
reconciliation can also be found in the Investor Relations
section of our Web site, which can be found at
www.rayovac.com.
In addition, when Dave goes through his discussion of our
operating results, in order to provide what we believe is
meaningful information, we'll use 2003 numbers which have
been adjusted to include Remington's 2003 net sales. So
the growth rates that we'll talk about will represent
organic growth trends. Table 4 in our press release
provides the detailed support for this discussion.
At this point, I'll turn the call over to Dave Jones, our
Chairman and CEO.
David Jones: Thanks, Nancy, and good morning all. Thanks for joining us.
Last night, Rayovac announced another great quarter,
rounding out a very successful year.
Q4 diluted earnings per share was 52 cents versus 39 cents
in the comparable quarter last year.
Pro-forma diluted earnings per share from continuing
operations were 60 cents. That's up 22% from 49 cents
reported last year, and 2 cents ahead of First Call
Consensus estimates.
Our full year fiscal 2004 results reflect record sales,
record operating profit, and record earnings. We ended the
year with net sales of 1.417 billion as compared with 922
million in fiscal 2003, an increase of 54%.
Diluted earnings per share for the full year were $1.61
versus 48 cents in '03. And pro-forma diluted earnings per
share from continuing operations were $1.83. That's a 44%
increase over the $1.27 we reported last year and a
substantial improvement as compared with our original
expectations for 2004.
As we go through our discussion of Q4 results, there are
four primary areas I'd like to highlight that have been
the major drivers behind our accomplishments both for the
quarter and for the year.
The first is organic growth. We saw strong 12% top line
growth during Q4 on an apples-to-apples basis, reflecting
strong organic growth across all of our major product
lines in all of our key geographic regions. For the full
year, organic growth was 13%, our highest growth rate in
over five years.
Secondly, our integration initiatives are proceeding
smoothly and in many key areas are ahead of plan. The
integration of Remington is now complete and the synergies
we've been able to generate there are substantial and at
the high end of our previous forecast.
Integration efforts at our newer strategic acquisitions,
Ningbo Baowang and Microlite, are also well underway. And
we're feeling more confident about the contributions those
businesses will make in 2005.
On the cost side, the effectiveness of our ongoing cost
management initiatives, above and beyond the synergies
we've generated through our integration efforts, has been
sufficient this year to offset the higher raw material
cost that we have experienced across our product
portfolio, and we expect that to be the case in fiscal
2005 as well.
And lastly, we continue to generate substantial cash flow,
which we're utilizing to invest in new growth initiatives
as well as to pay down debt.
Now let me take a minute to go over the fourth quarter
numbers.
We saw very strong top line results this quarter with
global sales of $377 million. That's an increase of 14%
over last year's pro-forma sales of $330 million, which
are adjusted to include Remington sales for the comparable
period.
Rayovac's global battery sales growth for the quarter was
12%, reflecting the strength in momentum in our Rayovac
and VARTA brands, as well as incremental sales from Ningbo
and Microlite.
Remington shaving, grooming, and personal care product
portfolio turned in another outstanding quarter with
growth of 21% over Remington sales in Q4 of last year.
This strong growth was largely driven by the success of
our new product introductions and it reflects momentum
across all of our Remington product lineup, with
particularly strong sales from our European personal care
business.
In North America, revenue was $169 million for the
quarter, a 6% increase over last year's results. We had a
very good quarter in our North American battery business
with 14% overall growth driven by very strong 16% growth
in alkaline batteries.
About $9 million was generated through hurricane-related
sales as compared with a little over $1 million in 2003.
Excluding hurricane-related sales, battery revenue was up
6%, reflecting the continued strong momentum in our
50%-more marketing strategy. Our alkaline battery market
share increased approximately 1 point during the quarter
as compared with last year.
Our North American Remington business was roughly flat for
the quarter versus last year, partly a result of balancing
down inventory at key retailers in preparation for the
sizable number of new product introductions we're
launching this fall. Remington shaving market share
reached an all-time high in 2004. Overall, North America
represented 45% of global revenue for the quarter.
Europe/Rest of World revenue grew to $165 million this
quarter, an increase of 18% over last year's $139 million
results. Remington products had a very strong quarter in
Europe with over 50% sales growth. This improvement was
achieved through the success of our new product
introductions particularly in the personal care product
line.
Our latest new product innovation, Remington's Wet 2
Straight hair product, hit the shelves in the UK during Q4
and follows on the heels of the bikini trimmer as the
hottest new product introductions in Remington UK's
history.
By the way, the Wet 2 Straight product is being rolled out
at retail in North America for this year's Christmas
season, and we have high hopes for a similar success in
this marketplace.
Our European battery business was flattish this quarter as
we've yet to see a real change in the stagnant European
economy or the overall battery marketplace. Market shares
in key product segments were stable to up-slightly. Europe
benefited from the inclusion of Ningbo results of $8
million and favorable foreign exchange. Overall,
Europe/Rest of World represented 44% of global revenue for
the quarter.
Latin American revenue grew from $35 million last year to
$43 million this quarter, a result of the Microlite
acquisition completed in May. We've had our challenges in
Latin America this year with soft economies in several key
regions. However, our overall market share was stable
during the quarter, and we are taking steps to reduce our
cost structure in certain countries. We believe we will
see earnings growth from Latin America including
profitable results from Brazil perhaps as early as next
quarter. Latin America represented approximately 11% of
global revenue for the quarter.
Now, moving on to integration efforts, we're proud to
report that the Remington integration is now complete and
ahead of schedule. Our final major initiative, the
consolidation of Remington's manufacturing facility in
Bridgeport, Connecticut into our Portage, Wisconsin plant,
was completed during Q4.
By all measures, the Remington integration project has
been an outstanding success for all of us. We completed
our global integration ahead of our original schedule with
no major interruptions to our business. And as a result of
our efforts we were able to take $35 million in real
operating costs out of the combined businesses, and that's
at the high-end of our original expectations. All of this
while driving Remington's business to a record year with
global sales growth of 18%.
Elsewhere on the acquisition front, we continue to make
good progress with the integration of Ningbo Baowang and
Microlite. Kent will provide more detail on these small
but strategically important acquisitions during his
prepared remarks.
On the cost side of our business, we continue to see good
results from our ongoing cost management initiatives. As
you know, we have a goal of reducing our cost of goods
sold about three to five percentage points each year on
top of any cost savings we generate through acquisition
synergies. These cost savings come through leveraging our
global scale and efficiencies in strategic sourcing,
procurement, productivity, and manufacturing.
Like everyone else in our industry, we've seen increases
in raw material prices during 2004 but we have more than
offset all of these increases through our cost management
programs.
You can see the results in our gross margins which have
shown improvement during the quarter as well as for the
full year and we expect to be able to offset all raw
material price increases in fiscal 2005 as well.
And lastly, Rayovac continues to generate significant cash
flow from operations. We generated cash flow of $18
million this quarter and $76 million for all of fiscal
2004, again well ahead of our original projections.
Our strong cash flow gives us the flexibility to invest in
new product innovation, an investment that we believe will
help fuel future top line growth of the type we've seen
this quarter.
We've increased our advertising budget to support our
brands. We're investing and expanding capacity and
improving efficiencies in key strategic manufacturing
facilities. And we paid down our senior credit facility by
$133 million this year.
We'll continue to use our strong free cash flow to
prudently invest in the high return areas of our business
and to decrease our leverage overtime.
Now, let me turn the call over to Kent at this point for
his analysis of our financial performance.
Kent Hussey: Thanks, Dave.
Our Q4 pro forma gross profit margin, which excludes
non-recurring items, was 41.4%. That's an increase of 160
basis points over last year's results.
The inclusion of Remington whose gross profit margins are
higher than those in our battery and lighting products
businesses was the primary driver of the improvement.
In addition, as Dave stated earlier, we've been able to
more than offset increases in raw material cost to our
ongoing manufacturing cost reduction program.
Ningbo and Microlite both of which are currently operating
our gross margins in the mid-20s tempered our margin
improvement.
Selling expense was $73.3 million for the quarter, up from
$47.4 million last year representing 19.4% of net sales.
The Remington acquisition accounts for the majority of the
increase with much smaller amounts attributable to Ningbo
and Microlite.
Research and development expense of $7.8 million
represented 2.1% of sales as compared with 1.1% last year,
an increase of $5 million. Again, the Remington
acquisition is the primary reason for the increase;
however, in addition we've dedicated additional resources
to our global product innovation group in order to
accelerate our new product development efforts.
Fourth quarter G&A expense was $23.4 million or 6.2% of
sales, and that compares with 7.3% last year.
Approximately, half of the $4.9-million increase for the
quarter is due to the Ningbo and Microlite acquisitions.
In addition to costs picked up along with the Remington
acquisition, we saw increased incentive and deferred
compensation expenses and increased legal and professional
expenses.
Operating income was $46.5 million, an increase of 64%
compared with the $28.3 million last year. That's due to
the inclusion of Remington and increased profitability in
both North America and Europe somewhat offset by the
impact of higher restructuring and related charges in the
current quarter.
Two thousand and four's fourth quarter results include
$4.9 million in restructuring and related costs associated
with the Remington integration.
In the fourth quarter of 2003, we expensed $900,000 in
restructuring and related costs associated with the
acquisition of VARTA and certain North American cost
initiatives.
Pro forma operating income, which excludes restructuring
charges and other non-recurring costs, was $51.4 million
this quarter or 13.6% of sales compared to $33.1 million
last year or 12.9% of sales.
Our operating margin improved as a result of the higher
margin Remington business and from increased profitability
in our core business, but the improvement was partially
offset by continued margin pressures in Latin America.
Segment profitability for the quarter was $69.9 million.
That's a 69% improvement over last year. Fourth quarter
segment profit margin was 18.5%, up 210 basis points
versus last year.
Remington was the primary driver of improved segment
profitability in both North America and Europe. North
America also benefited from increased battery sales and
lower operating expenses as a percent of net sales.
European results were favorably impacted by foreign
exchange as a result of the strong Euro.
Our Latin American business was impacted by unfavorable
foreign exchange rates and by lower margins in Mexico and
the Andean region.
All three geographies benefited from the favorable impact
on cost structures resulting from integration synergies
for both Varta and Remington.
Corporate expense was $18.5 million, an increase of $6.3
million versus last year. The majority of the increase is
attributable to an increase in incentive and deferred
compensation expenses, higher professional and legal fees,
and an increase in research and development expenses
associated with Remington.
Fourth quarter interest expense was $16.7 million, an
increase of 7.6 million as compared with last year as a
result of the higher debt levels associated with the
acquisitions.
Our effective tax rate for the quarter was approximately
38%, unchanged from the previous quarter. And net income
from continuing operations for the fourth quarter
increased to 18.3 million as compared to 2003's 12.9
million. Discontinued operations had an insignificant
impact in the quarter.
Fourth quarter pro forma net income from continuing
operations was $21.2 million, a 33% increase compared with
last year.
We've generated 52 cents in diluted earnings per share
versus 39 cents in the fourth quarter of fiscal 2003, and
pro forma diluted EPS was 60 cents, which is a 22%
improvement over last year's results of 49 cents.
For the full fiscal year 2004, pro forma diluted EPS was
$1.83, and that's a 44% increase compared with last year's
$1.27.
As Nancy mentioned earlier, we've provided a
reconciliation between GAAP and pro forma results in Table
3 to our press release and the information is also
available on our Web page.
Moving on to the balance sheet, total debt at yearend was
$830 million versus $943 million at September 30, 2003.
Our strong cash flow in 2004 allowed us to accelerate
principal payments on our senior credit facilities for a
total of $133 million, and that's in addition to the
retirement of $56 million in Remington's subordinated
notes which we assumed is part of that acquisition.
These reductions were offset by $62 million in additional
borrowings and assumed debt related to our Microlite and
Ningbo acquisitions and by a $13-million unfavorable
foreign exchange impact on our Euro denominated debt. We
ended the year with the leverage ratio of 4.1 times. Had
we not made the two acquisitions this year and applied
that cash to debt instead, our leverage ratio would have
been 3.8 times as of yearend in line with our target goal
of lowering leverage to less than four times.
Moody's, recognizing our strong cash flow and the success
in integrating Remington, recently raised our outlook to
positive.
Our trade accounts receivable increased by $15 million to
$270 million primarily as a result of the Ningbo and
Microlite acquisitions.
DSOs were 63 days compared with 65 days last year when
adjusted to exclude Remington's accounts receivable
balance from our year end balance sheet [Correction: the
adjustment includes Remington's net sales in the 2003
numbers].
Inventory was $265 million at the end of September
compared to $219 million last year, again largely
acquisition-driven.
Fiscal '04 inventory turnover was 3.8 times as compared
with last year's 3.6.
Cash flow from operations was $76 million for the year
after capital expenditures of $30 million and cash
restructuring charges also of $30 million.
Turing now to an acquisition update.
As Dave mentioned earlier, we've successfully completed
our our Remington integration. The combination of our two
companies has resulted in approximately $35 million in
cost eliminations, which will be fully realized in our
fiscal '05 results. Cash costs to fully implement the
integration initiatives were $35 million, $30 million of
which was paid out during fiscal 2004.
The P&L impact of restructuring cost for the year was
approximately $11 million, and we expect no further
restructuring charges for this acquisition.
Regarding our two newest acquisitions, Ningbo and
Microlite, integration initiatives are well underway. At
Ningbo, we've installed several new key executives and
begun upgrading accounting and financial reporting systems
and making improvements to both the quality and
performance of Ningbo products.
We're also in the process of adding a new double-A
alkaline production line, which we expect to be fully
operational during early 2005.
We've also made significant progress in Microlite. Our new
pricing initiative has seen good acceptance in the
Brazilian marketplace. We've launched a number of new
higher-margin products and are focusing on improving
productivity through implementation of Rayovac's best
practices at our manufacturing facility in Recife.
We're feeling good about the progress we've made to-date
and are confident that Microlite will become a solid
contributor to our operating profit by mid-year 2005.
As a result of both capacity expansion and productivity
investments at these two strategic acquisitions, we're
projecting fiscal 2005 capital expenditures to increase by
approximately $15 million over our fiscal 2004 spend of
$30 million.
I'll now turn the call back to Dave for his - Dave's
remarks.
David Jones: Thanks, Kent.
Before we move to Q&A, let me take a moment to address our
expectations for fiscal 2005.
As you know, our first fiscal quarter is traditionally the
strongest quarter of the year. At this point, we're
projecting pro forma diluted EPS of between 74 cents and
75 cents in Q1 on projected revenue of approximately $475
million to $500 million. This projection represents a 14%
to 15% EPS growth over last year's first quarter results.
We're also taking the opportunity to raise our guidance
for full year 2005 earnings to a range of between $2.10 to
$2.15 from the initial estimate of $2.05 to $2.10 we
provided on our last earnings call. This increased range
represents forecasted earnings growth of between 15% to
17% over final FY '04 pro forma results and is consistent
with our stated long-term goal of 15% to 20% annual
earnings improvement.
FY '05 global revenue is projected to be approximately
$1.5 billion, an increase of approximately 6% to 7% over
FY '04 results. We expect FY '05 cash flow from operations
of approximately $100 million.
In summary, fiscal 2004 was a record year in nearly every
respect. We delivered substantial increases in net sales,
net income, EBITDA, cash flow, and earnings per share.
We're delivering solid organic growth in all major product
categories and are showing good momentum in all of our
geographies.
Our investments in product innovation are delivering real
top line growth. Our key market shares are at all-time
highs. Our Remington integration is complete and we expect
to deliver significant cost benefits in FY '05.
Our acquisition integration activities at Ningbo and
Microlite are all on schedule. Ongoing cost savings
initiatives continue to deliver and our cash flow from
operations remain strong.
Overall, we think we made tremendous progress in FY '04.
And we're very bullish about our prospects for '05.
So at this point, we'd be happy to take any questions you
might have. Operator?
Operator: Thank you.
Ladies and gentlemen, if you would like to register a
question, please press star-1 on your telephone. If your
question has been answered and you would like to withdraw
your registration, please press star-2. If you're using a
speakerphone, please lift your handset before entering our
request.
One moment, please, for the first question.
Our first question comes from the line of Bill Schmitz
with Deutsche Bank. Please proceed with your question.
William Schmitz: Great, thanks. Good morning.
Kent Hussey: Hey, Bill.
William Schmitz: Can we first talk about Europe and the US in terms of the
private label business? I mean it's no surprise that
Wal-Mart's going to pull their private label business in
the quarter. And I also heard in Europe that the hard
discounters obviously are growing; it's no news to anyone.
But how is that impacting your business there? Have you
seen a big wave of competition on the private label front?
And how does that impact your profitability? And then
also, what percent of your total business in batteries is
private label?
David Jones: Well, let me first start with Europe. Europe has a much
larger private label concentration in this category than
North America. And it's consistent with, you know,
virtually any other category. So in Europe, something
around 20% or a little less than 20% of the European
battery business is private label. And that is an area
that is increasing in size. And, you know, from our
perspective, we participate both in branded product where
we have a Number 2 share position and as well as private
label in Europe.
So how it's affecting our business is, you know, as the
shift occurs, we're getting the sales albeit those sales
may be moving to private label.
In North America, private label is doing the inverse.
Private label, which represented about 8% of our battery
sales in North America, is actually declining and during
this fiscal year saw a significant decline. Significant
being it's probably down 1 or 1 1/2 share points
year-over-year. And so there are really no private label
pressures that are occurring in North America. And in
fact, you know, some larger private label retailers are
actually cutting back on their space this year.
William Schmitz: How is the Wal-Mart loss impacting your business? I think
it happened in mid-September. I think it's about 5% of
your North American battery sales - your North American
sales rather?
David Jones: Well, I'm not quite sure, Bill, where you got those
numbers. But Wal-Mart represents - our private label
business at Wal-Mart last year represented less than $10
million in sales. So it's a fairly insignificant part of
our product portfolio and even our battery portfolio. And
it also represented among the lowest margin of all of our
battery business.
So - and, you know, we didn't lose that battery business
in September. We've offset that particular segment four
months ago...
William Schmitz: Okay.
David Jones: ...which has been replaced with others - with - and
Wal-Mart is changing their mix, their battery assortment
mix, and it has been replaced with other SKUs and other
facings that we and they felt were more important.
So overall, Wal-Mart is de-emphasizing their private label
business in terms of number of facings and SKUs and the
sort.
William Schmitz: Right. Thanks very much. And then, in terms of Latin
America, are you expecting to go back to kind of
double-digit operating margins in fiscal '05? Because
obviously, that is a ton of influence on whether or not
you hit your new guidance.
David Jones: Yes, actually, if you - our projections would be that we
would get back to double-digit margins for all of '05,
Bill.
And, you know, the drag in Latin America is really
occurring in two markets. It's occurring in Mexico and
it's occurring in Colombia where devaluation affected
those economies last year as well as other factors. And
for a variety of reasons we nor the industry was able to
fully price up to handle the devaluations. So our margins
have been impacted in those two key regions as a result
of, you know, economic factors as well as devaluation.
In other markets, our business is doing between good to
very good. And, as Kent mentioned, you know, the last
quarter or so, because of the Microlite acquisition, we've
seen a drag on our overall results. But that's a condition
that is changing rapidly. We were able to effect
significant price increases in Brazil, and by the way,
Brazil is the largest battery market in Latin America and
our largest market in Latin America.
Since we've acquired the company a few months ago, we've
been able to effect significant price changes. And being
the market leader with over 55 share of the Brazilian
market place, pricing has to be done by us and we have
actually raised prices in the average of 16% in the market
place. And it appears that that price increase has stuck
and our competitors have - are following suit.
So that will go a long way towards returning
profitability, historic profitability to Microlite which
because of their cash start position prior to our
acquisition, you know, they became unprofitable. That and
with proper capital structure which we've put in place and
with a new product lineup that simplifies the offerings
and also gets a better margins structure, all of those
things should produce a Brazilian business that turns to
profitability relatively quickly as Kent said in the next
quarter or so.
William Schmitz: Great. Thanks.
And then one final question if I may. If my math is right,
year-over-year cost about 8 cents because of the higher
tax rate and because of the higher shares outstanding. Is
the 38% tax rate number we should assume going forward
because of the business mix shift towards continental
Europe?
And then also on the share repurchase front I think,
rightly so, you're more focusing on debt repayment than on
share repurchase. So should we assume that the share
outstanding number will probably stay at this level to
slightly higher going forward as well?
David Jones: Yeah, I think to your second part of that question, Bill,
you know, you ought to assume that there is not likely to
be share repurchase. We think there are better use of
funds, i.e., paying back down debt or investing in growth
initiatives.
And, Randy, you have a point of view here on tax?
Randall Steward: Yes.
We're estimating effective tax rate for '05 being around
37%. And, Bill, as you're looking year-over-year, if you
remember last year, effective tax rate was lower than this
year. That was because of the research and development tax
credit that we took, but directionally over the last few
years, excluding that we were in the 36% to 38% range.
William Schmitz: Great. Thanks very much.
Operator: Our next question comes from the line of Peter Barry with
Bear Stearns. Please proceed.
Peter Barry: Gentlemen.
Kent Hussey: Hey, Peter.
David Jones: Good morning, Peter.
Peter Barry: Can we focus on Remington for just a few moments?
I couldn't help but notice that revenues were about evenly
split between North America and Europe in Q4. Is that a
balance that you think can be maintained or is your
opportunity in Europe so substantial that it might likely
swing in that direction? And what might that mix mean for
margins going forward as it relates to Remington?
David Jones: I think, Peter, the quick answer is what you saw in Q4 is
not sort of the mix that you ought to think about in terms
of Remington business, i.e., Europe versus North America
going forward. I think you'll see in the current quarter
that, you know, the Remington North American business will
be dramatically higher than the European business because
it is a very seasonal business in shaving and grooming.
Personal care is a pretty much a year-round business. But
shaving and grooming is a highly seasonal business, you
know, with about half of its revenue generated in the
quarter that we're in right now, okay? And North America
has an extremely strong shaving business.
You know, as I've said our markets shares are at the
highest level in Remington's history as we go into this
quarter and we have many product launches that we're
rolling out right now.
And so I think you just saw a one-quarter adjustment in
Remington's business. For the full year, Remington was up
double-digits here and up obviously significantly more in
Europe. But we were trying to adjust inventory in the
quarter that we're in to make sure that when we launch all
of these new product initiatives that we don't have debt
or old inventory lying around on the shelves of retailers
that would get in the way of our success with the new
stuff coming in.
And so you saw a lot of those balancing initiative took
place, which is why you saw sort of a flattish quarter.
That one occurred in this quarter, okay?
Relative to Europe, what you've seen is extremely strong
sales in personal care product, particularly in the UK.
This Wet 2 Straight product that we've launched which is
revolutionary, and for any females that are on the call,
right now if you're going to straighten your hair, you
have to blow your hair dry and then you have to straighten
it.
Well, we invented a product that straightens your hair and
blows it dry simultaneously. And so it's a one-step
process, and it's been a very large hit and it has driven
disproportionately the amount of Remington sales growth in
the current quarter. Okay.
So over the long term though, you'll see as billed out the
Remington shaving and grooming business in Europe and
through the traditional VARTA sales and distribution
channels to our large retail customers there and that will
be a long-term growth driver of the Remington business in
Europe.
Right now, you're seeing the short-term driver as more
personal care focused products than shaving focused.
Peter Barry: So, Dave, assuming like a 2/3, 1/3 revenue relationship
North America to Europe that's probably a good
long-term...
David Jones: It's certainly a good view for '05, Peter. I think you may
see that shift. It starts to shift a little bit more
towards Europe out beyond '05 because a number of the
initiatives that we have in place, i.e., shaving and
grooming expansion are things that are occurring right now
but you won't see full benefit until, you know, the out
years.
Operator: Our next question comes from Lori Scherwin with Goldman
Sachs.
Lori Scherwin: I was hoping to follow up on the US battery business. In
Wal-Mart, I'm curious, what other facings you're getting
at the expense of private label. Is it in alkaline or is
it in carbon zinc or other low-end SKUs?
And along those lines, what is your outlook in '05 for the
business in terms of volume and dollar perspective for
both your business and the category? Do you still see
deflationary pressures as carbon zinc seems to be
increasing share?
David Jones: Well, let me first start with your specific question about
Wal-Mart, and let me just temper this by saying we do not
talk about any retailers' initiative. We quit doing that
years ago, okay?
But I would tell you that from a trend standpoint, the
change of facings that may occur at Wal-Mart or other
accounts should benefit alkaline and not benefit zinc
carbon, okay? So you should take some comfort from a
standpoint that we don't believe anybody is de-emphasizing
alkaline batteries, okay?
Zinc carbon is a component of Wal-Mart and other
retailers' mix, okay? And just for all of you who are so
US-focused, zinc carbon is the largest battery by unit
sales around the world. And it in fact represents
Rayovac's largest unit business, not our largest dollar
business. So we're very focused, we're not just an
alkaline-focused company as at least one of our
competitors are.
We're a full-range-focused company and we have a very
large zinc carbon business and focus. And any retailer in
the world that chooses to carry zinc carbon batteries,
obviously we'll be there with the high quality battery,
you know, at a very competitive price.
And so, relative to the second part of your question,
which is how do we view the battery category in the US,
you know, we're seeing traditional unit growth of
somewhere between 6% and 7% which is on the long-term
growth trend if you were to track growth over 20 years,
the average has been 6% to 7%, and that's what you're
seeing.
And actually we're seeing some improvement in dollar
growth. This quarter we seen some modest, for the
industry, increase in dollar growth and actually we're
seeing less deflationary pressures than we would have seen
a year or two ago because the market has returned to
relative stability.
Lori Scherwin: I guess two things. First, on that 6% to 7% unit growth,
was any of that just due to this quarter on the
hurricanes? Are you seeing that over a longer-term
perspective?
David Jones: We saw it over the full year, and we really don't pay a
lot of attention to, you know, a bleep that may have
occurred because of hurricanes. So maybe hurricanes added
a percent or less than a percent, you know, in terms of
unit growth in all of North America. Remember hurricanes
occurred in only one principal state and that was Florida.
Kent Hussey: Yeah, let me just jump in and remind people that the
traditional tools that people use to measure performance
of the category like IRI and Nielsen have become less
relevant in the recent, more recent time periods. There
are significant channels of distribution that do not
report through Nielsen and IRI, and some of those channels
are fairly significant and are experiencing good growth in
the battery category.
So when Dave talks his numbers, it's based on our
compilation of data from a lot of different sources about
what's happening in the market place.
David Jones: Right. And just a follow-on point on that, if you're
trying to extrapolate IRI data as an example, you're
missing Wal-Mart, you're missing Home Depot, you're
missing Lowes, you're missing Sears, you're missing Best
Buy, Circuit City, dollar stores, and most high growth
areas that are occurring in this category.
Lori Scherwin: Okay.
And then just lastly, I know guys there seems to be
gaining distribution in dollar stores for carbon zinc.
Does this concern you at all especially given your
position in the market?
David Jones: No, and I'm glad you pointed that out to me because
frankly, I wasn't even aware of that. So, no, it doesn't
bother us at all.
Operator: Ladies and gentlemen, please limit yourself to one
question and one follow-up question.
Our next question comes from the line of (Lyd Kim) with
Banc of America Securities.
(Lyd Kim): Yes, good morning. Actually, our questions were mostly
answered. But I was wondering if you had a pro forma
EBITDA number for us for the year and the quarter?
Randall Steward: EBITDA?
Kent Hussey: Are you - (Lyd), are you asking EBITDA?
(Lyd Kim): Yes.
Randall Steward: Yeah. For 2004, there was a schedule on our earnings
release. But it was $202 million for the year.
(Lyd Kim): So that would include the pro forma contribution from the
acquisitions basically?
Randall Steward: Yeah. That would be only for their actual results for the
time period that we acquired them.
David Jones: That was negligible.
Randall Steward: Yeah, which is really, you know, breakeven.
(Lyd Kim): Okay, thank you.
Randall Steward: You bet.
(Lyd Kim): Okay.
Operator: Our next question comes from the line of Andrew McQuilling
with UBS.
Andrew McQuilling: Thanks very much.
Two questions. Kent, how much of the 35 million in
Remington synergies, how much did you realize in the
September `04 quarter?
David Jones: You know, we don't measure how much actually flows in the
quarter, Andrew. We track initiatives; we know the cost
throughout of the business. But, you know, it's fairly
complex business model. There are a lot of moving parts.
And we've changed our entire organization structure as a
result of the Remington integration. Monies are now being
channeled in the things like global product innovation,
increased investments in advertising, etcetera, etcetera.
So, I can't give you a precise answer. I will tell you
that most of the savings related to people and facilities
are in-hand. But a lot of the synergies are still in front
of us relative to call it supply chain, purchasing, and
some manufacturing kinds of efficiencies.
So, there's still a significant chunk left to come in `05
that will benefit from next year versus this year.
Andrew McQuilling: Understood.
And in terms of - you know, it's very impressive, your
ability to offset the raw material cost. What type of -
you know, as a percentage of gross margin, what type of
raw material cost swing did you see in fiscal `04 and in
the quarter? And if you could break it out by Remington
and Rayovac, that'd be great.
David Jones: I think - I can't break it out by any product line. But I
can tell you that we saw - in total, we saw in the range
of like $7 million to $8 million worth of raw material
price increases across all of our businesses during `04.
So, while that's a reasonably good size number, it's not a
large number, okay. And as one of us said, we more than
offset that. And the reason is that we've had for years
way back before me here, we've had for years a continuous
everyday mindset of cost reduction in our business. And
over the last few years, we've been able to take out as a
percentage of standard cost anywhere from 3% to 4% on an
annual basis of real cost out of the business.
So, this year, we weren't able to take out that full 3% to
4%, but it was sufficient to offset all cost increases.
And I'll just give you another point of reference. In our
worst case scenario, we would expect costs might increase
this year another $7 million to $8 million, okay. And
we've already identified $20 million of real cost offsets
to offset that $7 million to $8 million increase should it
occur.
So we feel very comfortable that in `05, we have all the
inflationary factors covered. I mean they're real. Some
will occur, maybe all will occur. But we've projected that
and we've offset it all.
And I think you've heard that, you know, from some other
competitors that we have and I think, you know, the
industry has probably been very good at driving costs and
inefficiencies out of our business models for a long
period of time.
Operator: Our next question comes from the line of Connie Maneaty
with Prudential Equity Group.
Constance Maneaty: All right, good morning.
Kent Hussey: Hey, Connie.
David Jones: Good morning, Connie.
Constance Maneaty: Okay.
You know, in the old days, the little oligopoly used to
take price increases like every other year - every two or
three years.
David Jones: Those are your words, right?
Constance Maneaty: Right.
David Jones: Okay.
Constance Maneaty: Given the increase in raw material cost, what do you think
the odds are of a price increase in batteries in maybe the
next year or two?
David Jones: You know, my sense is, Connie. And this is just Dave
Jones's opinion, okay.
I think over the next year, it would be challenging in
North America because of the competitiveness of the
category as well as the retailer landscape in North
America. If there's opportunity, it's probably selectively
with smaller categories than alkaline.
In Europe, there's probably not a lot of opportunity in
general batteries, but there probably is some opportunity
in some segments like rechargeables or...
Kent Hussey: Photo.
David Jones: ...photo, our hearing aid business as an example.
As a competitive, let's say, it's a little bit different
in Europe. You know, we have much better market share
position there.
And in Latin America, there's good opportunity. In fact,
last year in Latin America towards the end of the year, we
raised prices in a number of markets. I used Brazil as an
illustration. It was our best - I think it was the best
thing that we did.
But in many other markets, we were able to raise prices to
offset FX. The only two markets again that I mentioned
that we were unsuccessful were Mexico and Columbia where
our market share leadership was much more fragmented. I
mean, in Mexico, all three principal brands have a large
market share position and so, you know, it - to raise
prices has a little bit different strategy, etcetera, in
that market.
So I would - hopefully, that was helpful. And I just
assume I would say there's little opportunity in North
America except for specialty batteries, little opportunity
in Europe except for specialty and some potentially good
opportunity in Latin America.
And, you know, relative to Remington products, probably a
little bit better opportunity in - among those product
lines which are typically driven by product launches and
innovative features. So if you're able to prove to
retailers and to consumers that you're offering them
something better, i.e. features or performance, you're
typically able to get some prize as a result of it.
Constance Maneaty: Great. That's helpful.
In Europe, for VARTA I think one of the first questions,
if the market there is 80% branded, 20% private label, is
that the split in VARTA sales as well? And what's the
difference in your business between private label
operating margins in Europe and branded?
David Jones: Okay, let me - there are a few points to that question
there.
VARTA has - we have, again, we've said we have Number 2
branded market share position in Europe. We have number
one private label market share position in Europe. And so,
you know, we think regardless of how the mix occurs that
we're covered in terms of a business strategy, so, i.e.,
if private label accelerates, you know, we feel like we're
in the right position there.
And in terms of margins, the gross margins are
significantly different because in branded batteries or
branded anything, you apply all your overhead and all of
your advertising and marketing initiatives against that
branded product. And in private label we really have no
cost structure.
In Europe, we run our private label business with only two
or three people in total. And so it's a supply chain
that's extremely efficient. And as a result, if you get
down to bottom-line margins, there's not appreciable
difference between branded and unbranded products.
Operator: Our next question comes from the line of Charles Griege
with Atlas Capital.
Charles Griege: Good morning, guys.
David Jones: Hey, Charles.
Kent Hussey: Good morning, Charles.
Charles Griege: Just a few follow-up questions. When you talk about cash
flow from operations, you're really speaking to free cash
flow, correct?
David Jones: Yes.
Charles Griege: So it's net of CAPEX?
David Jones: Yeah, right.
Charles Griege: I just wanted to clarify that.
David Jones: Right.
Charles Griege: Now with 76 million this year and you're guiding to about
100 million next year?
Kent Hussey: Right, yes.
David Jones: Yeah. And that's 100 million even after increasing our
CAPEX next year from 30 million to 45 million.
Charles Griege: What a perfect segue. Can you talk a little bit about the
increase in the CAPEX? And in the context of that, can you
talk about growth CAPEX versus maintenance CAPEX in your
business for `04 and `05?
Kent Hussey: Yes, (Chuck), the entire increase is related to these two
strategic acquisitions that we've done.
To put it in perspective, battery manufacturing - alkaline
battery manufacturing in China is far and away the lowest
cost location for manufacturing those kinds of batteries.
We have a very modern facility there. It makes both zinc
carbon and alkaline, but it only has capacity for about
250 million alkaline batteries.
So our goal is to, as our business grows, invest in modern
capacity to expand alkaline production in China to give us
a source of high quality, low cost batteries.
So there's about 10 million slated for some new capacity
for double-A and triple-A batteries to be produced in
China. And those batteries will, you know, be available
for serving the domestic market in China and even more
importantly for markets around the world.
Our Microlite acquisition is one where we have extremely
low manufacturing cost for zinc carbon batteries. The
plant in Brazil is very large and is highly vertically
integrated, it's the most vertically integrated plant that
we now have in our portfolio of manufacturing facilities.
We see that as the logical place for expanding our zinc
carbon production, which would give us the ability to have
what we believe is world's lowest cost zinc carbon
manufacturing capabilities down there. And so we've slated
about $5 million for some capacity expansion and other
call it cost improvement equipment for that facility to
give us a very low cost position.
And obviously zinc carbon is the majority of what we sell
in Latin America, so as we ramp up our capabilities in
Brazil, we'll be supplying more of our markets throughout
Latin America with those low cost batteries.
David Jones: And also, (Chuck), think of next year's CAPEX at 45
million probably being at a high water mark because of the
initiatives that Kent just said. And future years beyond
'05, you know, you'll likely to see it normalize into the
mid-30s in terms of ongoing CAPEX to support the business.
Charles Griege: If I could just ask a quick follow-up on that. You're - by
expanding the productive capacity of those two plants,
does it give you more cost opportunities at some of the
other plants around the world that you own that may not be
quite as efficient as those two after those investments?
David Jones: I think it gives us, as Kent said, think of it this way,
for our future capacity needs, we're moving to a model
where the future capacity needs of our business worldwide
and alkaline will be provided out of China, which is an
area and we're in the Ningbo province, we're near in
Shanghai, we're in a very cost effective area of China.
And we think that will give us lowest cost possible
alkaline production. And, you know, we'll increase that
capacity. Kent said right now we have capacity of about
250 million alkaline batteries. In, you know, in two years
from now that number's going to be at least triple,
somewhere in that range.
And then in Brazil where we've got capacity right now for
roughly 500 million zinc carbon batteries, we think it
will give us lowest possible cost capacity when we're
through for maybe a billion batteries.
Kent Hussey: And then answering your question, (Chuck), we do run our
operations manufacturing activities on a global scale. And
our manufacturing people, supply chain people optimize
where we produce batteries for the lowest possible
delivered cost to our customers meeting their service
requirements.
So, this will give us more flexibility to balance our
manufacturing and optimize new overall cost structure of
the company.
Operator: Our next question comes from the line of Chris Ferrara
with Merrill Lynch.
Chris Ferrara: Good morning.
Kent Hussey: Hey, Chris.
Chris Ferrara: I was wondering if you could talk a little bit about that
big operating margin you put up in segments in North
America and how much that might have related to some storm
related sales and just how sustainable that might be. I
mean I know it's seasonal but I just wondered if you could
give a little color on that.
Kent Hussey: It is seasonal. Batteries, there was a spike in batteries;
Dave talked about it for the quarter. But I think as
you've heard from other manufacturers you tend to sell a
lot of C and D flashlight batteries, radio batteries, and
flashlights, all of which have much lower than average
margins. So, the hurricane actually was a drag on
operating margins not a contributor.
The positive impacts or things like the growth of
Remington's portfolio product, shaving and grooming
products, are higher than average margins.
And we do get some volume benefit as well at this time of
the year as our plants are running, and you know, we're
getting ready for the holiday season. We're running at
very high levels of utilization and efficiency.
David Jones: Yeah.
And you're seeing cost synergies, Chris, you know, as a
result of all the things that we've done. And just for the
record on this hurricane sale, you know, it's nice that we
had a bump of, let's call it, $7 million or $8 million in
revenue but we got little contribution in terms of profit
contribution. Because by the time you sell those low
margin products to them, which are not in your normal
forecasting cycle, and by the time you expedite delivery
at any means possible, you know, at the end of the day you
don't make a whole lot of money.
Chris Ferrara: Okay.
And I was wondering one other thing, it's kind of off the
beaten track, but I mean what have your expenses been like
with respect to getting up to speed on Sarbanes-Oxley?
And, you know, has that been at all material and what
would you expect sort of the flow of that to be and when
will you see that go away year-over-year?
Kent Hussey: Yes, you've seen an increase incurred this year of over
approximately a million dollars on a year-over-year basis
for compliance.
We do see that, you know; continue for fiscal '05; our
compliance date is September 30, '05. I think after that
you'll see it - it obviously won't go away but you won't
see year-over-year increases.
David Jones: But, Chris - or everyone, think of that as sort of a
permanent cost of every public company....
Kent Hussey: Every public company.
David Jones: ...business. And while we may spend a million dollars on
compliance or testing this year, you know, we're still
going to have an ongoing cost to continue to comply and
test it and be audited.
Kent Hussey: We've doubled the size of the internal audit department as
an example.
David Jones: Right.
Kent Hussey: And that's what we'll maintain.
David Jones: That does change the focus obviously of the financial
group also during that time period.
Operator: Ladies and gentlemen, we have time for one last question.
And our last question comes from the line of (Anne Gillin)
with Lehman Brothers
Ann Gillin: Thanks. Pressure's on.
Kent Hussey: Hey, Ann.
Ann Gillin): Good morning, everyone.
Kent Hussey: Ask a good one.
Ann Gillin: All right. Let me go to number three; actually the - just
following up on some of the capacity additions in China
and Brazil, can you just tell us kind of where US capacity
will level out as that capacity comes online?
Kent Hussey: Well, in the US we have two plants. You may recall, we
have a large alkaline plant in Fennimore, Wisconsin and we
have a large button cell and micro power plant in Portage,
Wisconsin.
We're running our alkaline plant in total in Fennimore
probably 80% to 85% capacity right now. And we're running
that plant seven days, 24 hours, okay?
Our alkaline plant in Germany is also running seven days
at about 85% capacity.
So, while we're not out of capacity, you know, we're
bumping up there pretty good, which is why we are moving
at warp speed to moderate lines into China. And, you know,
those things take approximately once we order a double-A
or a triple-A line it takes approximately a year to build
it and install it.
Ann Gillin: Okay. Very helpful.
And, Dave, is that 80% to 85% a year round number or does
that reflect the peak level as you gear up for...
David Jones: It's, you know, I would say you can assume maybe 80% year
round, it's a little bit of a gear up mode right now just
because of the season that we're in.
Kent Hussey: We're at 95 right now.
David Jones: Yeah.
Ann Gillin: Okay.
David Jones: Yeah, maybe 90 right now or so.
But you know I think 80% is a good number to think of.
Ann Gillin: Great.
And then just as you bring on this extra capacity -
additional capacity, does that allow you to be more
pro-active around some of the seasonality of usage going
forward?
David Jones: Yeah, probably so. You know, there is some building that
we do now because we know in certain key towns that we're
running flat out. And as a result we will several months
before start.
And, you know, it probably gives us a little bit better
ability to manage working capital, you know, once we get
more capacity online, you know, in that area of the world.
Operator: I will now turn the conference back to Mr. Jones. Please
continue with your presentation or closing remarks.
David Jones: Okay.
Okay. Thanks, operator, and again thanks to all of you for
spending an hour with us and for your continued interest
and involvement in the company.
We - in '04 - and no matter how you look at it, we had a
record year. And I think all of us in the management group
and our Board feel very good about what we've been able to
accomplish. Particularly in a time when we did our first
major diversification move, and we did it very
successfully. So, this should give you comfort that, you
know, we're managing the business in the right way that
we're focused on the right things.
We have good momentum going in a business; we continue to
invest in new product development and we're spending an
enormous amount of money in research and development of
new products and new concepts for the future. We believe
that and focus on brand is what's going to allow us to
continue to be a top performing company.
So thanks, have a great day. Happy Veterans Day.
Operator: Ladies and gentlemen, that does conclude the conference
call for today. We thank you for your participation, and
ask that you please disconnect your line.
END