Spectrum Brands - Earnings Call - Q4 2019

Transcript

Speaker 0

Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal twenty nineteen Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question and answer period.

Star then the number one on your telephone keypad. Should anyone need assistance at any time during this conference, please press star then 0, and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, November 13. Thank you. I would now like to introduce Mr.

Kevin Kim with Spectrum Brands. Mr. Kim, you may begin your conference.

Speaker 1

Thank you, Zatania. Welcome to Spectrum Brands Holdings Fiscal twenty nineteen Q4 earnings conference call and webcast. I'm Kevin Kim, Divisional VP of Investor Relations and moderator for today's call. To help you follow our comments, we've placed a slide presentation on the Events Calendar in the Investor Relations section of our website at ww.spectrumbrands.com. This document will remain there following our call.

Starting with Slide two of the presentation, our call will be led by David Mora, Chairman and Chief Executive Officer Doug Martin, Chief Financial Officer and Randy Lewis, Chief Operating Officer. After their opening remarks, we will conduct the Q and A session. Turning to Slides three and four. Our comments today include forward looking statements, including our outlook for fiscal twenty twenty and beyond. These statements are based upon management's current expectations, projections and assumptions and are by nature uncertain.

Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated today, November 1339, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10 Q and 10 ks. We assume no obligation to update any forward looking statement. Also, please note we will discuss certain non GAAP financial measures in the call. Reconciliations on a GAAP basis for these measures are included in today's press release and eight ks filing, which are both available on our website.

I will now turn the call over to David Maura.

Speaker 2

Hey, thanks very much, Kevin. Thanks everybody who's joining us on the phones today. Look, good morning. I'm extremely pleased to update everyone today on our progress. As we stated twelve months ago, the goal is to stabilize our company in 2019 and position it for growth in 2020.

And today, are confirming that. We have stabilized our business in 2019 and we are returning to profitable growth in 2020. We ended fiscal twenty nineteen on a very strong note. The fourth quarter in fact reflecting the best quarterly top and bottom line year over year growth of the entire year, given us significant momentum as we enter 2020. We also have a significantly stronger balance sheet.

We have tremendous amount of liquidity and we delivered on our full year adjusted EBITDA expectations. Our management team is focused on delivering stability. We focused on delivering stability in 2019 and we emphasize the importance of execution, investment and with the resetting of our Home and Personal Care Appliance business. Despite the added challenges in 2019 of tariffs, the difficult selling season for our Home and Garden business, our teams rose to the challenge and overcame all the external headwinds that were presented to us in 2019. Pet had a fantastic year, posting both healthy top and bottom line growth.

Home and Garden benefited from shelf space gains. And while HHI's revenues were somewhat below expectation, the team at HHI was able to deliver on their profitability goals for the full year, in fact expanding EBITDA margin by 20 basis points. Additionally, the team worked through the divestiture of our Battery and Global Auto Care businesses, and very importantly kicked off a multi year global productivity improvement plan, which we now expect to generate over $100,000,000 of run rate savings in the next eighteen to twenty four months. The vast majority of these savings will be redirected to reinvest in our base businesses to further foster future growth and to offset additional tariff cost pressures as we enter fiscal twenty twenty. We believe with the actions taken over the past eighteen months, we have set the new foundation of Spectrum Brands, which will enable us to deliver significant long term value creation and produce sustainable growth going forward.

I would be completely remiss not to pause and take an opportunity to thank all 13,000 of our employees globally. These Spectrum Brands associates around the world not only helped me and the senior team with the divestitures that we've previously mentioned, but also implemented our global productivity improvement plan and maintained their passion and commitment to helping build the faster, smarter, stronger Spectrum Brands of the future. We would have not been able to complete over 3,000,000,000 in asset sale divestitures, deliver on our commitments under the TSAs to Energizer, pay off over half our debt in just the past ten months, while at the same time investing behind all our business units to execute on our phenomenal turnaround plan and restore the stability of our operating businesses without a relentless focus from everyone on the team. I'm very, very proud and honored to be associated with each one of you. And for all the our partners, employee partners that are dialed in, I wanna thank you sincerely from the bottom of my heart.

Thank you so much for all your efforts in 'nineteen. If I could turn your attention to Slide seven, 2019 accomplishments, plans going forward are as follows. First of all, we delivered $567,000,000 of adjusted EBITDA in fiscal twenty nineteen, and we overcome headwind we overcame headwinds from tariffs, a softer U. S. Housing market, challenging weather and FX.

Secondly, we materially improved our capital structure. Our net debt declined from over 5.2 times to 3.1 times as we sit here today. At the 2019, our total our net debt to EBITDA was 3.1 times, which hit our target. And this was accomplished with the divestiture of two business units, which allowed for debt reduction of $2,400,000,000 Third, we decreased our average borrowing rates. We most recently extended the duration of our liabilities by tendering for the majority of our six and five H notes and issuing $300,000,000 of new ten year paper at 5%, extending duration and lowering our cost of capital.

Fourth, we returned $350,000,000 through share repurchases of $269,000,000 and dividends of $86,000,000 The Board of Directors and I currently believe that our shares are materially undervalued relative to our intrinsic worth. As such, we're announcing this morning plans to repurchase up to an additional $250,000,000 of our shares. We will continue to maintain prudent leverage as we expect to generate approximately $250,000,000 of free cash flow in the current fiscal year. As we enter the new year, our drive for vision, clarity and focus remains firm. Our passion to simplify our business model and to run our company like true owners with much greater efficiency and higher returns has only increased.

We plan to grow both organic sales and EBITDA in 2020 and beyond. After stabilizing the company in 2019, I am very pleased to report to you all that we expect all four of our business units to grow in 2020. Our Spectrum 2020 guiding principles remain vision, where we're taking the company clarity, what we prioritize and focus, how we execute. This is our pathway to a consumer driven mindset. We will accept nothing but outstanding quality and service, while increasing innovation and marketing investments behind our brands.

These actions are driving a culture of greater accountability, much quicker decision making and with an experienced and energized leadership team refreshed with new talent and focused on operational excellence, we're positioning our company for improved sales, earnings and sustainable free cash flow growth. Now you'll hear more from Doug on the financials and Randy will give you an update on the business units. Over to you, Doug.

Speaker 3

Thanks, David, and good morning, everyone. Turning to Slide nine and a review of Q4 results from continuing operations beginning with net sales. Net sales increased 1.9. Excluding the impact of $12,500,000 of unfavorable foreign exchange, organic net sales grew 3.2% with growth in Global Pet Care, HHI and HPC being partially offset by a decline in Home and Garden. Gross profit fell 3.5%.

Gross margin of 33.7% decreased 190 basis points as higher input costs, tariffs and accelerated depreciation relating to a decision at the end of the year to close a close certain Latin America plants were partially offset by positive pricing and productivity. SG

Speaker 2

and

Speaker 3

A expense of $232,000,000 decreased 7.5% or 23.4% of net sales this year compared to 25.8% a year ago driven by lower HRG merger related costs and other cost control efforts. Operating loss was was driven by the impairment of Home and Personal Care goodwill and other intangible assets of about $151,000,000 higher input costs and tariffs, higher depreciation and amortization and higher restructuring charges related to the Global Productivity Improvement. Net loss and diluted loss per share were driven by the operating loss, partially offset by an income tax benefit, the unrealized gain in our Energizer common stock, lower interest expense and a smaller loss from discontinued operations. Adjusted diluted EPS of $1.13 increased 10.8% due to lower interest expense and lower adjusted average shares outstanding. Turning to Slide 10.

Q4 interest expense from continuing operations of $37,000,000 decreased $20,700,000 driven by lower debt levels. Cash taxes during the fiscal year were approximately $53,900,000 comparable to last year. Depreciation, amortization and share based compensation from continuing operations of $55,700,000 increased from $33,600,000 last year, primarily due to higher share based compensation and the impact of HPC depreciation and amortization this year as a result of moving the unit back into continuing operations. Cash payments for transaction and restructuring and related charges for q four were 9,500,000.0 and $6,700,000 respectively versus 21,100,000.0 and $36,800,000 respectively last year. Higher cash spend last year was driven primarily by the HHI DC consolidation and divestiture activity.

Moving to the balance sheet, Slide 11. We completed Q4 in a strong liquidity position including $779,000,000 available on our $800,000,000 cash flow revolver and a cash balance of $627,000,000. Debt outstanding was $2,400,000,000, down 50% from last year. And as a reminder, over the course of 2020, we plan to replay the previously disclosed $200,000,000 to Energizer in connection with the divestitures of BARDA business, and we'll complete the redemption of the remaining $117,000,000 of six and five eight bonds this week. Capital expenditures were $18,000,000 in the quarter versus $19,300,000 last year.

Now turning to Slide 12 and our 2020 guidance. Spectrum Brands expects low single digit reported net sales growth with foreign exchange expected to have a slightly negative impact based on current rates. Adjusted EBITDA is expected to be between $570,000,000 and $590,000,000 and this guidance includes global productivity improvement plan benefits and the impact of tariffs that are currently in place. Now from a phasing perspective, we expect Q1 to be negatively impacted by the annualization of tariffs and stranded costs related to the divestitures. We expect growth in the remaining three quarters of the year.

Fiscal twenty twenty adjusted free cash flow from continuing operations is expected to be between $240,000,000 and $260,000,000 Depreciation and amortization is expected to be between 200 and $210,000,000, including stock based compensation of between 55 and $60,000,000 versus $54,000,000 in 02/2019. Full year interest expense is expected to be between 140,000,000 and $150,000,000 including approximately $10,000,000 of noncash items. Restructuring and transaction related spending is expected to be between 90,000,000 and $100,000,000 and capital expenditures are also expected to be between 90,000,000 and a $100,000,000, including productivity plan improvement enabling capability investments. Cash taxes are expected to be between 45,000,000 and $55,000,000, and we do not anticipate being a significant US federal taxpayer during fiscal two thousand twenty as we continue to use net operating loss carryovers. We ended the year with approximately $800,000,000 of usable federal NOLs.

And just as a reminder, for adjusted EPS, we use a tax rate of 25%, including state taxes. Now I'll turn it over to Randy for a more detailed look at the business unit performance.

Speaker 4

Thanks, Doug. Good morning, everyone, and thank you all for joining us today. I want to open by reiterating David's comments that we are very proud of our combined accomplishments during the fiscal twenty nineteen year in the face of material headwinds. We're excited about the future outlook of the platform as benefits start to deliver from our global productivity improvement program execution. So now let's walk through the results of each of the business units.

Turning to Slide 14 and Hardware and Home Improvement. The fourth quarter reported net sales and organic sales increased 1.11.3% respectively, while adjusted EBITDA improved 3.5%. Despite the softer U. S. Housing market and slowing remodel activity, residential security sales benefited from new product innovations in both electronics as well as mechanical products offering features from our SmartKey technology.

In the quarter, we were very pleased with the successful launch of our new cloud platform and new mobile app. This proprietary system will be crucial to future projects in the connected security market, making it easier for the consumer to have real time access and control of their lock sets anywhere they have The recent launch of Aura, our new Bluetooth enabled lock under the industry leading QuickSet brand, is just one of several examples of products that will sit within this new ecosystem. Looking forward, we are very excited about the outlook on electronic deadbolt and smart locks in 2020 given the relatively low but fast growing US residential adoption rates. More importantly, we are excited about our electronics product road map and the new innovations that we will add to our ecosystem in 2020 and beyond.

Similar to this year, going forward, we expect more moderate new build activity. Nonetheless, we are confident in our ability to grow with our market leading brands, excellent service levels, product quality in both the new construction and repair and remodel markets. Now to Home and Personal Care, which is Slide 15. Fourth quarter reported net sales increased 1%. Organic net sales grew a solid 4.2%, while adjusted EBITDA declined 17.2%.

Sales growth reflected sequential improvements from the mid single digit declines to the first three quarters of the year that have been driven by prior year hair care distribution losses in The US. We previously communicated 2019 to be a year of resetting this business. The division's new leadership team installed in February has done an excellent as rebalancing cost structure and with the objective of accelerating profitable growth has undergone a comprehensive review of its guiding strategy. In short, our way forward can be summarized as a renewed commitment to support our trusted brands of Remington, Black and Decker, Russell Hobbs and George Foreman in a global sense by being a cost effective producer of compelling and innovative products that benefit consumers' everyday lives. Additionally, our biggest ever investment, which established Remington as the official global styling partner of Manchester United, is already enhancing the brand in markets around the world.

And our insights driven innovation pipeline gives us great confidence we have a product road map that will drive accelerated sales growth going forward. For example, the team is investing internationally to drive awareness of the innovative Remington Curl and Straight Hairstyler that features unique twisted plates, enabling consumers to straighten or curl with one Also, the team is building excitement around our new market leading George Foreman indoor grill series. As an example, we have a much anticipated new product, which is launching in the back half of fiscal twenty twenty. It has already received committed wide scale distribution and will be supported by a dedicated new advertising campaign. There's so much more to come.

We believe this renewed focus, new leadership on supporting our brands and investing behind fewer, bigger, better products will lead to growth in 2020 and beyond. Moving to Global Pet Care, which is Slide 16. Fourth quarter reported net sales increased 7.9% and adjusted EBITDA increased by 30.3%. Excluding currency impact, sales grew 9.2% in the quarter, and we saw strong growth in our top regions. On a full year basis, all five global regions delivered solid growth, driven by the continued globalization of the business team's processes strategies.

In fiscal twenty nineteen, our strongest growth came across the portfolio with our strategic core brands collectively growing 16% on a year on year basis. Our dog shoes business continues to perform well. We are taking share across the globe. In The US, which is our largest market, we picked up two share points as our chews brands experienced double digit POS growth in tracked channels, which was twice as strong as the overall Across that, we continue to work to optimize global manufacturing, reduce the supply chain costs, and optimize brands and SKUs to improve our market market structure. Our pet team is committed to shedding unproductive assets and focusing activities to invest more time and resources into our top growth brands.

This will help position our pet care business well given the future category growth projections due to increasing participation rates and the passion of pet owners and care giver base everywhere. Turning to Home and Garden, which is slide 17. Fourth quarter reported net sales decreased 4.3% and adjusted EBITDA decreased 1%, primarily due to weather that was less conducive to insecticide sale. Despite these results, full year sales improved 1.6, and we grew our share again in the category largely due to strategic alignment with customers and strong growth in herbicides and repellent categories. In 2020, our targeted growth will be driven by new products and by marketing support that will convert consumers newly entering the category.

We continue to believe strongly that the barriers to entry remain high in this business and our value proposition to consumers with strong brand equities and increasing investments in product development and marketing will accelerate Home and Garden growth rates and continue our market share. Turning to Slide 18, we also wanted to provide an update on our global productivity improvement plan. This program continues to be our most important strategic initiative at this point. Through its efforts, we are changing our operating model to allow quicker, more globally aligned decision making within each of our businesses, driving more focused and relevant product innovation with enhanced consumer analytics and r and d processes. And we're also centralizing and standardizing the functions that support those commercial operations with a very strong focus on process efficiency and technology enablement.

Savings from these changes along with significant benefits from new center led sourcing processes are creating funding that we will reinvest in higher levels of marketing and further technology enhancements. Since our last call, we have completed wave one of our strategic sourcing work stream with over $35,000,000 of run rate savings to phase in during fiscal twenty twenty. And we've initiated wave two that is expected to deliver even more savings in the. Additionally, we've begun executing changes in our international commercial structures, and we're improving gross margin rates in our global pet care business through the closure of Latin American manufacturing plants. We now expect the gross annualized savings from sourcing and other global productivity improvement program cost improvements to be at least $100,000,000 and that these savings will be at full run rate within the next eighteen to twenty four months.

In the short term, these benefits will also be used to help offset the estimated 80,000,000 to 85,000,000 of incremental tariff headwinds in fiscal twenty twenty. We look forward to continuing to provide more details on the GPIP benefits on our future calls. Now back to David.

Speaker 2

Yeah. Thanks, Randy. Thanks, Doug. Look, before going to Q and A, I've got to take a moment to just say, hey, thanks to Doug Martin. Doug has served us for five years.

And without his steady hand execution this year, I wouldn't have been able to have to got the divestitures done, the TSAs implemented. Doug is is is just been a great team player, a great business partner. And I just wanna thank Doug publicly for his five years at Spectrum Brands and and wish him the very, very best in in his next endeavors. Also, Dave Pritchard's been with us for about nine years, and he is also retiring in December. And and we wanna thank Dave Pritchard for all his many contributions here at Spectrum Brands.

I also wanna welcome on board Jeremy Smeltzer, who's already hit the ground running and is knee deep in Galileo and, I'm sorry, global productivity improvement programs. And, I just really welcome welcome Jeremy to the team who joined us October 1. The transition was exceedingly smooth. So, again, that's a big thank you to both Doug and Jeremy. So Dave, Doug, Jeremy from all of us at Spectrum Brands, thank you.

And I'll turn it over to Kevin for follow-up questions.

Speaker 1

Great. Zetania, let's just dive right into Q and A.

Speaker 0

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

Speaker 5

Good morning, and congratulations on a nice fiscal twenty nineteen and also to Doug and Dave on their pending retirements and next ventures.

Speaker 6

Thanks, Bob.

Speaker 5

So I wanted to start with the GPIP. And maybe you could just expand a little bit. Obviously, you're progressing progressing very well and you have some very big expectations for savings. Can you talk about how you plan to balance the reinvestment back into the company in incremental marketing versus R and D versus other things? Where are the savings going and how will they ultimately drive future growth?

Speaker 2

Look, I'll lay out the big strokes and then I'll turn it over to Ray for more details. Look, our initial cut at this was I wanted to get about $100,000,000 of productivity flowing through the P and L, and we initially wanted to drop about half of that to our shareholders and reinvest the balance into R and D, innovation, new product development and marketing. So as I've been saying, I think it's been eighteen months since I took on this new endeavor. I really want to focus the company towards more of a sales and marketing organization and really drive organic growth and get to better places. And so it's really a mindset shift.

It's really a new way of doing business. But the next couple of waves that we're gonna go through, quite frankly, Bob, are gonna be about automation, really bringing IT enablement. Jeremy Smeltser actually has got a fantastic background. He's done this before. And so it's just, you know, the ability to get data, quickly slice the data, analyze the data, make faster, quicker, better decisions is gonna bring a lot of prosperity to us and all our stakeholders.

And that's kind of where we're going. Those are the broad strokes. I think you know, to be blunt, given the tariff situation, we'd be less than honest with you if we didn't tell you, look. We're we're unfortunately gonna be using a lot of the global productivity improvements in 2020 to just offset these unfortunate tariff headwinds, which we view as transitory, but they are nonetheless really affecting our reporting earnings in a negative way. And so we're using more of those savings than we'd like temporarily

I think that'd be the only commentary I'd give around it. Randy, if you wanna expand.

Speaker 4

Yeah. Bob, I would just say, you know, the key thing for us is that we're efficient with this reinvestment. So we're focusing very heavily on capability development within the organization so that we can ensure that the money that we are choosing to put back into the business is going to have a positive return for all of us. So it's kind of broad based, and it varies from one business to another based upon where we are in different stages of that process. But we are most focused on ensuring that we're chasing the right innovation based upon real data insights from consumers and not from the traditional approaches within CPG companies, and then being more efficient at that development, and then last, being able to effectively engage the consumers and the retailers in the storytelling around that innovation.

So it's gonna be a measured pace. We don't expect to be at the full investment run rate until, you know, well into the next fiscal year, but, you know, we're already seeing benefits from the beginning of those reinvestments.

Speaker 5

Okay. Great. Very helpful color. And then we've talked about this a little bit on previous calls, but can you talk a little bit about the online strategy and penetration and how you're targeting incremental online growth in '20 in fiscal twenty and beyond.

Speaker 4

Yeah. Bob, one that's one of the key work streams within the global productivity improvement program is omnichannel operations. And, you know, it's really key that we don't separate out online as being different than bricks and mortar. And so the the mindset change here is that we talk omni, which is having all aspects of opportunities to to interface with our consumers engaged in one overall encompassing strategy. And so we are building very key capabilities with data scientist analytics that are driving us for different behaviors in that space.

But that's one of the areas that will be center led across the four businesses as we go forward into this year.

Speaker 5

Okay. Super. Then last one for me. I'll get back in queue. Obviously, a terrific year on the pet side.

One of the that, you know, had also been discussed previously was, you know, some of the operating efficiencies, I guess, at the European tolling businesses. Any update on improving that those operations in in fiscal twenty or beyond or where that stands?

Speaker 4

So across the European business, we've done a substantial amount of work over the over the course of fiscal nineteen. It's it's kinda tied up in the strategy of globalizing our businesses. We talked earlier about in my prepared remarks about streamlining for better decision making within the businesses, and that's part of the previous matrix structure that we had, eighteen months ago or so that kept us from being aligned on strategies. And so we've driven a substantial amount of cost out of our European business within Pet and seen substantial improvements in in the effective rates of that business as a result of that. So overall, you're gonna we're gonna see good, really good margin expansion in that business, and that's a main driver of it is the European restructuring.

Speaker 5

Great. Thanks very much.

Speaker 4

Thanks, Bob.

Speaker 0

Your next question comes from the line of Olivia Tong with Bank of America.

Speaker 7

Great. Thanks. Good morning, and congrats to Doug and Dave. First question is actually on the savings and the tariffs. So you've got $100,000,000 of savings coming in the next, let's call it, one and a half to two years.

80,000,000 to $85,000,000 in incremental tariffs, it's a little higher than you had originally anticipated. So as you think about the deployment of those savings, how much is pricing contributing to that? And to the extent that you have these savings, what's your view on what you know, if if there's a pull and push? Like, are you are they coming equally from reinvestment versus dropping the bottom line, or are you going to make sure you protect the reinvestment and maybe less flows to the bottom line? I'm just trying to understand your thought process on that.

Thank you.

Speaker 2

Yeah. Let let yeah. Let me take the headline. Randy will do the details as usual. Look.

I am wildly proud of our team to do 567,000,000 EBITDA in '19, to be steering at a wave of another 80 plus million of tariffs in 2020. You know, the run rate numbers we gave you, we're not there yet. And, oh, by the way, we're gonna step up investment in marketing spend by another $22,000,000 run rate, you know, probably half of that at least to hit, the balance of of what's left to 2020, we are not backing away from doing what is right for the company long term. In other words, let me state it another way. We could manufacture a $600,000,000 EBITDA number in 2020 if if that's you know, if all we wanna do is impress the street.

We wanna run this business like owners, and we wanna continue to invest for the long haul. And so we will continue to prioritize reinvestment in r and d, innovation and marketing until we get the top line results that this company is capable of. I'll stop there and I'll let Randy clean up any mistakes I made.

Speaker 4

Good morning, Olivia. So I would tell you to think of pricing varying by business unit based upon kind of the channels, the competition, and the strength and positioning of the brands. But overall, the offsets on pricing are are the largest portion of offsets that we have to the tariff headwinds. And so when we look at the remaining savings coming out of the the global productivity program, you're exactly right. We have a strong bias to protect those reinvestments.

We obviously have to balance that across all of our stakeholders. But as David said, we are highly committed to the messaging that we've been giving for the last eighteen months, which is we're changing the focus, and we wanna be much more concerned about where we're going to be in two and three years and where we're going to be in the next quarter.

Speaker 7

That makes sense. Thanks. Appreciate that. And then on cash flow, it was, you know, it was it was nice to see that it stabilized a bit and to see the improvement that you're expecting for next year. But it is it was a little bit low relative to our expectations.

Know? So first, what didn't go quite as you had anticipated for fiscal twenty nineteen, particularly relative to last quarter's commentary? And then what are the big drivers of the improvement in fiscal twenty twenty beyond savings program? And should we expect more improvement in first half versus second half given the comps? Or will it still be primarily second half loaded?

Speaker 2

Hold on. Just to clarify that. Cash flow, you mean free cash flow? EBITDA, what are talking about?

Speaker 7

Free cash flow.

Speaker 3

Free cash flow, Olivia, in 02/2019, as you know, was kind of difficult to to see through to given the divestitures and the discontinued operations and allocation of interest expense across the two. It actually came in pretty much where we expected it to overall when you think about the working capital impact in in discount, which I know you don't have visibility to. But that's that's really where that's really where we we expected it to come in. Because we had so much cash in the balance sheet at the end of the year, though, did not, and we had done this earlier. And then we dialed back on some factoring programs, which are really cost effective from a capital structure management perspective, but weren't necessary when we were sitting on on cash.

So if there was any one thing that was different than our expectations, expectations, it would have been it would have been that.

Speaker 2

I also look, I think what you know, from my seat, right, we're we're trying to generate a $100,000,000 in productivity savings, but we're spending a $100,000,000 of cash restructuring to get it. That's not a bad payback. Right? If the 100,000,000 of savings is in perpetuity and you paid for it, it paid for itself in less than, you know, eighteen months, that's probably a good allocation of capital organically. I mean, that is an understatement, obviously.

I think that's really good allocation of capital. But clearly, those cash restructuring charges that are embedded in our midpoint of two fifty of free cash flow, they are gonna roll off. And so, obviously, as you get into 2021, you have a pretty nice free cash flow left. So I'm pretty bullish on not only the free cash flow for 2020, but the free cash flow growth going forward, if that helps.

Speaker 0

Yep. Thank you. Your next question comes from the line of Sam Reid with Wells Fargo.

Speaker 8

Awesome. Thanks so much guys for taking my questions. And, let me add my congrats to Doug and Dave as well. Quick question here on on global pet, again, this quarter. Wanted to get a sense as to how this growth compares to the underlying category, especially in The U.

S? Because it really does seem strong given the somewhat mature nature of the underlying product segment. And then along those same lines, could you walk us through any shelf space gains you might be getting there as well? Thanks.

Speaker 2

Look, I think our pet business, as you know, was mismanaged for a number of years. I think our pet business was just a collection of me doing acquisitions. I think over the last two to three years under under, well actually the last year under JP, John's taken over that business. He's got a team that's got incredible vision and passion for innovation. I think I've spoken to you publicly, I was early, think for like most of most of the past eighteen months, I was talking about how PET was gonna turn, and and it took a little longer to turn.

But I would just tell you we've got a team that's that's really walking, you know, walking the talk when it comes to real r and d, real new product development. I mean, I was at the Pet Expo Show down in Orlando. I think I mentioned this in a previous public call. And, I mean, we had three years worth of new product offering, a real product road map with really innovative stuff. So look, we are absolutely outperforming the category and we're gonna continue to outperform the category because we have what the customer wants.

We're bringing news and excitement and innovation and we're just getting started. So, congrats to John and the entire, pet division. We are extremely proud of them and they're looking forward to the best yet to come out of pet. Randy can add details.

Speaker 4

No. I think you said it well, David. And, Sam, we we are growing above the category. We we would look at The US category where we compete and expect CAGR there in the two and a half to 3% range. Obviously, our last two quarters have been well ahead of that, and, that's indicative of the all the efforts that David just talked about.

And and we have a very clear strategy that we're trying to get to there, and we're starting to to deliver on that.

Speaker 8

Awesome. No. Thanks so much guys for the color. It's really helpful. Wanted to maybe sneak another one in just quickly on HHI.

Just kind of how much of the growth during the quarter was reflective of pricing specifically? And and how is that pricing maybe impacting your volumes in this segment as you take that? Thanks so much.

Speaker 2

I think we want to be careful on pricing because we have competitors that listen in and all the rest of that fun stuff and we're public. Look, we did take pricing in that division, right? We're number one market share position. We're dominant brands. We are the clear leader.

I will tell you that this is not an inelastic place to play. And so you've got to be really clear. Clearly, have a very interest rate sensitive housing market. As you guys remember, I think it was this time a year ago, I think I spooked everybody on housing saying I was seeing a slowdown, which we did experience. I think we're working much better with our retail partners.

I want to thank our retail partners. We have recently seen some POS uplift due to some of our pricing programs. And we are very excited about some of the new digital lock offerings we're coming out with. And we've launched our own cloud, which is basically allowing us to have a ubiquitous offering. I think one of the things we want to focus on going forward in HHI is bringing clarity at point of sale.

Digital locks are really just where the growth is. We're the leader there. We want to continue to be the leader. We want to put more chips on that table. But it's still confusing for a DIYer to go there and and know whether they need a Zigbee, a Z Wave, a home kit, Google, Apple, WiFi, Bluetooth.

And so we need to continue to bring clarity there and and and help the customer at the point of sale. But we expect another solid year out of HHI. We wish housing was a little bit better. See as opposed to last year, we kind of see multifamily slowing down. We think kind of the single family space is doing okay.

Clearly with full employment and interest rates where they are, that's very supportive of household formation. But we remain number one there and we're gonna continue to invest behind that business.

Speaker 8

Your

Speaker 0

next question comes from the line of Ian Zaffino with Oppenheimer.

Speaker 6

David, I just kind of wanted to key in on your comments of stock being undervalued. Is there a target you have out there for the buybacks? Or maybe just broadly speaking, what's sort of the pace of the buybacks? And what should we sort of expect of that going forward? Then I have a follow-up.

Speaker 2

Well, the lower the price, the more we'll buy. The higher the price, the less we'll buy. No. Look. I have a we have the board, and I have a view on on what our intrinsic value is.

You know, I've been in this space for about twenty years. I've never seen the discrepancy between what people call value stocks and growth stocks. And in in the consumer product space, the delta between what somebody calls growth at two or 3% and value that, you know, a lot of companies reporting negative 2%, I mean, it's ten, twenty times EBITDA deltas. It's it's it's ridiculous in my mind. And so I look at our business.

I look at our free cash flow. I look at our brands. I look at the portfolio of assets we have, and we think that shrinking the float makes sense at these levels. I I think anybody that would look at where we trade on a multiple of EBITDA or free cash flow yield, hopefully, their HP 12 C works as good as mine.

Speaker 6

Okay. Thanks. And then also just touching on some of the hair care distribution losses they experienced last year. Are there new products out there that you're gonna be launching to maybe backfill some of those losses or maybe recoup some of those losses? Or or or how do we kind of think about just that?

Speaker 2

Maybe Yeah. Absolutely. We just won back category captain at a at a a fantastic retail partner. We didn't love kind of the shelf space we had even after that. We're having those conversations.

Randy can tell you about I mean, we have a plethora of new product launches that we're excited that are coming out. We didn't just enter into an agreement with Manchester United for Europe. We've got a lot of new exciting Remington front. Remington is one of our best known brands in our entire portfolio, and the growth we've experienced with women here with women's hair care has been explosive. And the you know, it's just our European teams have just been doing a much better job to be completely brutally honest with consumer insights.

But now we've got a brand new team running The United States since, I think, February, April. It's it's almost a 100% new leadership team, and that's where we're putting our money, consumer insights and marketing. And and you're gonna see a complete relaunch of George Foreman in a in a couple of months.

Speaker 4

Yeah. Ian, this is Randy. I would say to follow-up David's comments, we feel like we've had a very strong capability in product development for quite a while, but we weren't necessarily pointing that capability in the right direction with regards to either what the consumer was wanting or how to ensure that we were managing our portfolio across our retail customers very well. I'm extremely proud of the new team and what they've been able to do to not only figure out how to get the right insights to point our capabilities very strategically, but also digging in and having tough conversations with our fantastic partners. And we've not been in the current position with regards to partnership with key retailers in in my history with the company.

Very strong and, you know, still very difficult conversations in today's world, but we're now playing in a space as far as that relationship that we haven't been for quite a while. So it's products. It's also relationships. It's also the data that David talked about as far as bringing to them the analytics about how to optimize their category, and we're gonna do extremely well with that. And then, you know, just in the Remington business, we talked about the Manchester United partnership, and that has been phenomenally successful so far.

We've had over 300 activations in 25 different countries. We've had, approaching a million consumer engagements. We're seeing very positive returns with perception and intent to buy as a response to that. So we're very happy with that.

Speaker 6

Alright. Thank you very much.

Speaker 0

Your next question comes from the line of Faiza Alwy with Deutsche Bank.

Speaker 9

Yes. Hi. Good morning. And congratulations from me too on, you know, Doug and Dave's retirement. So my question is just if I look at slide 18, it feels like there are a lot of sort of interesting things going on at Spectrum, a lot of change going on.

And I just wanted

Speaker 2

to hear from, you know, from both sort of That's an understatement.

Speaker 9

Yeah. So I wanted to hear from you, Dave, and maybe from Randy a little bit in terms of how are you, you know, ensuring that, you know, you had a lot of execution issues a couple years ago. So how are you ensuring that, you know, you don't run into those types of problems again?

Speaker 2

You know, look. I hate looking in the rearview mirror. I would say most of the guys in this room well, let's just look forward. Look. I think I think a lot of those mistakes with going forward, we're gonna make sure we measure twice, cut once.

We're not we're we are doing this with a with a fantastic partner within AT Carney. We are using, you know, on any given day, 40 to 70 FTEs for ATK. This is a management team that is no longer looking to reduce cost by issuing simple, what they call, reduction in force. We are looking to educate our employees to help them become the best versions of themselves they can. We're looking to put IT, automation, big data in front of them to help them drive decisions to be much more efficient.

And so it's just a new mindset. It's a new way of doing business. Yes, it's a lot of change, but it's being underwritten exceedingly well. And honestly, I owe a debt of gratitude to Randy and Doug and Jeremy and Aason Zagar and all the operational leaders for partnering with an outside team that helps double check, dot every I, cross every t, and honestly hold us accountable. It's very hard to audit oneself.

Extremely beneficial to have an outside third party in every day working with you, you know, hand to hand, you know, locked arms to go achieve a goal. And I think that would be the best way I could describe the different approach that's being taken this way, as opposed to, the missteps of the past that you referenced.

Speaker 4

Yeah. Faiza, this is Randy. I believe you and I spoke about this maybe a few weeks back, and I think it's a great question. David's exactly right. This is is completely different company than the two and a half years ago when those previous projects were undertaken.

And this is an internally executed transformation, but we're doing it in a very collaborative way. We're doing it with a fantastic partner. We're doing it with a tremendous amount of oversight, and it's it's just a different environment completely. I'm highly confident in our ability to execute these these initiatives and to do so with net positive results along the way. We've got new leadership in three of our four businesses.

We've got substantial new talent enhancements within the senior leadership of each of the individual businesses. We've got new people leading our corporate initiatives. All of this has been done with an eye on creating the right type of environment to foster this change.

Speaker 9

Great. Thank you, and good luck.

Speaker 2

Thank you so much. Appreciate it.

Speaker 0

Your next question comes from the line of William Reuter with Bank of America.

Speaker 10

Good morning. You laid out, the two year target for a run rate basis for the global productivity improvements. Do you know what you're going be achieving in fiscal year twenty twenty? So what will be in the fiscal year 2020 P and L?

Speaker 2

That's for us to know and you just find out at the end of the year.

Speaker 10

Okay. Sounds good.

Speaker 8

That's good. I did a good job with the question.

Speaker 10

You you guys have talked a lot about the expectations that you're gonna continue to have better growth of the electronic deadbolts, smart locks, etcetera. Guess, can you talk a little bit about what percentage of your products are in the the segment of those products? And what types of growth rates you expect maybe either this year or over the next couple years?

Speaker 2

Oh, they're it's not big enough. The denominator is still too small. That's why we're trying to grow it. But I don't know if Randy wants to give any detail. I don't know if we're gonna break that out not.

Speaker 3

Yeah. Bill, I would tell

Speaker 4

you, we we don't really break that out, but it is clearly the fastest growing segment within that space, both for the category and for ourselves. And so we're we're really excited about this cloud that I talked about and the technology that that supports that on the back end. I think as David mentioned, all of the confusion in this space, this gives us an opportunity to really cut through that to make it very simple and easy and reliable for consumers to make a choice and to be happy with it. We've got the new Bluetooth lock Aura that we launched a few months ago. It's doing extremely well, already clipping along at several million dollars of of revenue rate in just the first couple months.

And we're we'll be launching another major, new lock in that space within the next four to six weeks, and that one has even more potential. So, it's it's our fastest growing segment and our biggest, strongest focus.

Speaker 10

And then lastly, you did a pretty good job of laying out both your expectations for free cash flow this year as well as what you guys are gonna do in terms of share repurchases. I guess that it would imply that more or less your leverage target is around where you are right now. Is that how you guys are thinking about things?

Speaker 3

To the extent that William, this is Doug. To the extent that we do, in fact, make the Energizer payment back later this year and do execute up to a 100 up to $250,000,000 of of share repurchase, then we probably will add about a half a turn of leverage, sir.

Speaker 10

Okay. That's all for me. Thank you.

Speaker 0

Your next question comes from the line of Carla Casella with JPMorgan.

Speaker 11

Hi. Thanks for taking the questions. One question on the, looking into the holiday quarter. Any impact we should think year over year from just the number of department store closures that have gone on since last holiday?

Speaker 2

No. Don't worry about us on the department store end. I think we're fine. What we wanna be very open about is that we do expect to divot in our first quarter. Tariffs are impacting us, and they're gonna hurt us mostly on the front end of fiscal twenty twenty.

So we expect to divot in q one. We expect to make it up Q2, Q3, Q4. So again, I'm not a big fan of guidance, but we do want you to understand the pacing of the year. Tariffs will hurt us a lot more in the front end, and then our productivity savings will flow in the back, That's how we'll get to the full year guidance we gave you.

Speaker 11

Great. And looking at those tariffs, can you give us a little more color by segment? Like which segments will be most impacted in the beginning part of the year?

Speaker 2

Yeah. I think right now, you know, the stuff coming off the boat where we're having to pay higher tariffs on is gonna be both in our appliance unit and and quite frankly, HHI.

Speaker 11

Okay. Great. And then, the plant closure, that you mentioned, is that is it complete, or could we expect any kind of inventory, safety stock, or other as we go into the coming quarter?

Speaker 3

These are these are relatively low, relatively small, rawhide plants, and we've been been planning this for a while. It's been in fact, they're closed, and production has been shifted to new supply, and we have no inventory issues here at all.

Speaker 11

Okay. Great. And then just one last one on the m and a front. You mentioned m and a versus asset sales. You mentioned shedding some assets in pet.

What categories are the most unproductive and what could be timing on exiting? Would it be a category exit or just certain brands or certain products?

Speaker 4

Carla, I think you're probably referring to my prepared comments. This is Randy. And what I was alluding to there on on productive assets were those manufacturing facilities throughout Latin America.

Speaker 11

Oh, great. Okay. Thank you for clarifying. That's all I have. Thanks.

Speaker 2

Yes. Thanks, Karol. Your

Speaker 0

final question comes from the line of Karol Martinson with Jefferies.

Speaker 8

Good morning. Just to be clear, the adjusted EBITDA guidance of $570,000,000 to $590,000,000 that builds in the 80,000,000 to $85,000,000 of tariffs that you expect this year? It does. Yes, does.

Speaker 2

Then if you get

Speaker 8

if we get List 4B, that would be above and beyond that.

Speaker 2

That's correct.

Speaker 8

Okay. And just wanted to get a sense of when we talk about the dividend in the first quarter, how much of these stranded costs remain? And and what's the pace of getting those out of the the the p and l here? Or is it all

Speaker 5

mostly total tariffs?

Speaker 3

Sure. Drew, this is Doug. We don't you know, it's it's a number that we're not we won't disclose publicly, but it's also not a huge number. It's a headwind for us, and we've been working against it as we've as we have exited some TSAs with Energizer, Energizer has exited TSAs with us, but this is also being addressed by the Global Productivity Program. And we started this work well before the the deals were closed.

And the only governor on it is is our timing on the exits across the different markets around the world. So it's in there. It's in the guidance. It's being addressed. Just thought it was important to mention the timing and the impact of the phasing of it on our quarter.

Speaker 8

Okay. And just when you guys look at Home and Garden, you know, are you seeing shelf share shelf share I can't speak. Shelf share gains when it comes to Roundup?

Speaker 4

So this is Randy. We are seeing some gains, especially in home centers with our brands, and I think it's more to do with our relationships and the products and the investments that we're putting behind our brands than necessarily anything else. But I can tell you, again, relationships are strong. Product innovation pipeline is strengthening, and we're working very well with those those key customers as long as well as the mass channel. And, I think that's the main driver of our gains there.

Speaker 8

Okay. And I just like to add my thanks to Doug and Dave here for for their service. Thank you.

Speaker 2

Thank you. Thanks, Karru.

Speaker 1

Thank you. And with that, we've reached go

Speaker 2

ahead, operator.

Speaker 0

There are no further questions at this time. Thank

Speaker 1

you, Zatania. So with that, we've reached the top of the hour. So we'll conclude our conference call. Thank you to David, Doug and Randy. And on behalf of Spectrum Brands, thank you for participating in our Q4 twenty nineteen earnings call.

Speaker 0

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