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spk07: Good day and welcome to the Q4 and full year 2022 Spectrum Brands Holdings earnings conference call. I would now like to turn the call over to Faisal Khadr. You may begin.
spk01: Thank you. Good morning and welcome to Spectrum Brands Holdings Q4 and full year 2022 earnings conference call and webcast. I'm Faisal Khadr, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we have placed a slide presentation on the event calendar page in the investor relations sections of our website at www.spectrumbrands.com. The document will remain there following our call. Starting with slide two of the presentation, our call will be led by David Mora, our Chairman and Chief Executive Officer, and Jeremy Smeltzer, Chief Financial Officer. After closing remarks, we will conduct the Q&A. Turning to slides three and four, Our comments today include forward-looking statements which 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 November 18, 2022, and our most recent SEC filings and Spectrum Brands Holdings' most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement. Also, please note we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website in the Investor Relations section. Finally, we encourage you to listen to our remarks today alongside with reading Spectrum Brand's press release and 8K issued today and our annual reports on Form 10K once it is filed with the SEC. Now I'll turn the call over to David.
spk00: Hey, thanks, Vessel. Good morning, everybody. We thank you for joining us today for our fourth quarter fiscal 22 conference call. I'm going to kick the call off today with a discussion on the dynamic environment we are operating in, and I'm going to talk about our company's operating and strategic direction. Jeremy is then going to provide a more detailed financial and operational update with discussion of our specific business unit results. If I could turn your attention to slide six. We entered fiscal 22 with very favorable economic conditions driven by factors such as high COVID-19 demand in and around the homes. low interest rates, and abundant capital. Low unemployment and high consumer confidence spurred demand for our products. We planned for a growth year based on strong consumer demand and retailers ordering high amounts of inventory as they anticipated high sell-through rates. We anticipated headwinds from input cost inflation, including historically high ocean freight costs, but had planned for price increases to offset these margin pressures. Unfortunately, we faced additional headwinds as the year went on with supply chains around the globe becoming more inefficient and supply chain costs also increasing during this time with port slowdowns and high inventory throughput, the system causing demurrage, detention, and distribution costs to spike. Then the macroeconomic environment started to change during late in the second quarter in Europe as the Russia-Ukraine war negatively impacted consumer confidence. Subsequently, the U.S. retail outlook changed during our third quarter as consumer demand softened and retailers focused on reducing high inventory levels. Finally, the U.S. dollar started to strengthen in the fourth quarter, leading to unfavorable translation impact on our fourth quarter results. In addition, a significant transaction headwind developed for our EMEA-based businesses who sourced the majority of their goods from Asia in U.S. dollars. All in all, the macroeconomic environment has become more challenging as the year progressed. In response, we implemented multiple rounds of pricing to offset some of these cost pressures. We also reacted quickly and decisively to the declining unit volume late in the year, and we initiated cost-out actions, including reductions in headcount. More fundamentally, we pivoted the operating strategy of the company from expansion and increased investments to running a leaner company that is focused on fundamentals, free cash flow generation, and debt reduction. We immediately began a cost reduction initiative during the previous quarter to prepare the company for a more difficult economic outlook in the short term. I could now have you turn to slide seven. Here we have an overview of our fourth quarter results. The challenging economic environment I just mentioned is clearly impacting our performance and results as both our net sales and EBITDA modestly declined in the quarter compared to the prior year period. Consumer demand is continuing to normalize to pre-pandemic levels for our hard good categories. Our retail partners are maintaining their focus on taking out inventory, which is translating into lower replenishment orders. The strong U.S. dollar is further causing our reported sales to be lower due to the impact of translational FX. The volume decrease is contributing to the EBITDA decline, which is also pressured by high demerge and detention costs and distribution costs related to supply chain inefficiencies. Some of these pressures are offset by the benefits of cost reduction actions, including headcount elimination that we initiated during the previous quarter. Although pricing now largely offsets the inflation we experienced in the quarter, We faced new headwinds from the stronger U.S. dollar, which directly increased our product costs in various regions through transactional foreign exchange impact, in addition to the unfavorable translation impact on the reported results. We will cover fourth quarter financial performance and business overview in more detail during Jeremy's section. If I could now have you turn to slide eight. Here we have a quick overview of our fiscal 22 results. And as I mentioned earlier, this was a very challenging year for the business, where we faced a variety of headwinds that continued to get worse as the year progressed. Unfortunately, however, we were proactive with our countermeasures as we initiated multiple rounds of pricing action to offset inflation headwinds. We took further cost reduction actions, including headcount reductions back in May, as we experienced the demand softening and the related retailer inventory reduction actions. All these actions were mitigating some of the EBITDA decline from the various macroeconomic headwinds. We are also implementing further price increases around the globe now to help offset the additional pressure from currency movements. Turning your attention to slide 9, the measures that we started to implement in fiscal 22 have actually put us in a good position as we enter fiscal 23. We will continue with those measures and refocus our strategy around four core pillars. One, we are streamlining our organizational structure and re-energizing our employee base. Two, we are increasing operational efficiencies everywhere and limiting risk. We are protecting and deleveraging the balance sheet, strengthening our liquidity. And finally, fourth, we are transforming the company into a pure play global pet and home and garden business with faster growth and higher margins pro forma. Starting with the first one, we have taken swift action to reduce our operating costs by eliminating certain roles with an eye towards streamlining our operational structure. These reductions required some difficult decisions, including reductions in every segment of the business involving leadership positions and painful reductions in the C-suite. Along with these reductions, we have continued to invest in the future of the business by bringing in new talent with fresh perspective and best-in-class operating experience. For example, I'm thrilled to welcome our new head of global supply chain, David Gabriel. who has joined us from Stanley Block & Decker, as well as our new head of our home and garden business, Javier Andrade Marin, who joins us with a very strong consumer marketing background and has worked at companies such as P&G, Henkel, and Ruckert Benckiser. Second, we are reducing costs by simplifying our business model to focus on fewer, bigger, better initiatives. This includes exiting unprofitable SKUs, and rationalizing our product portfolio. This new approach is allowing us to focus on the opportunities to really accelerate profitability across all our business units. We will continue to look for process simplification and cost out opportunities as we move through the fiscal year. Thirdly, we will maintain our focus on reducing working capital and strengthening our balance sheet as we prepare for a period of low demand growth and higher interest rates. We have truly turned a corner on improving our working capital performance, as evidenced by our reduction in inventory by over $100 million during our fourth quarter, including HHI. And we further plan to reduce our inventory by an additional $200 million plus during this fiscal year. David Gabriel will be leading the company towards a world-class S&OP process, which will further support our goal of driving working capital efficiency and generating more cash. In addition, in a proactive move, given the longer than originally anticipated time to close the HHI sale, we have executed, along with our relationship banks, an amendment to our credit facility that temporarily increases our net leverage ratio tests. Lastly, we remain dedicated to our strategic transformation to become a pure-play global pet and home and garden company. And to that end, we are committed to closing the HHI transaction, and we expect to win the DOJ lawsuit. We now expect to close this transaction no later than June of 2023. The HHI transaction close will allow us to substantially reduce our debt and return capital to our shareholders. We are confident that equity investors are looking to allocate capital to a faster growing, higher margin, pure play, global pet and home and garden business, resulting in a significant re-rating of the valuation of our publicly traded shares. If you move to slide 10, I'd like to give you an overview of our outlook for fiscal 23. Our high level fiscal 23 earnings framework is that we will continue to execute on our strategic priorities and we expect to grow the top line in the low single digits. We expect to grow adjusted EBITDA in the low double digits. We expect the cost environment to remain challenging with certain input costs including labor to continue to increase with some offsets from a decline in the ocean freight rates. Overall, we expect to experience net inflation, but not nearly as significant as the levels we've seen over the past two years. We are also implementing additional pricing actions in the first quarter, specifically in our European markets, to offset additional inflation from the ongoing war in Ukraine and from the strengthening US dollar. We expect this additional pricing to be fully reflected in our results during the second quarter. The first half of this year will therefore remain challenging from a margin perspective as we sell down our remaining higher cost inventory levels and get the full benefit of price increases in Europe. Specifically, we have approximately $55 million of excess capitalized variances on our opening balance sheet that will roll through the income statement in the first half of fiscal 23, predominantly in the first quarter. Based on our current input costs, this negative impact to our earnings will be behind us as we enter the second half of fiscal 23. In fiscal 23, we are committed to strengthening our balance sheet and generating cash to pay down our debt. We will utilize cash from operations, inventory reduction, and the proceeds from the HHI transaction to pay down debt and reduce leverage. As I mentioned, we are confident that we will receive $4.3 billion of cash upon the completion of the HHI sale. However, just to address some of the questions that we've been receiving, in the unlikely event that the HHI transaction does not close, we expect to have cash inflows in excess of $500 million this year, which includes the HHI break fee. In either scenario, we expect to decrease our net leverage to five times or less by the end of fiscal 2023. Now you'll hear more from Jeremy on the financials and additional business unit insights. I now turn the call over to you, Jeremy. Thanks, David. Good morning, everyone.
spk05: Let's turn to slide 12 for review of Q4 results from continuing operations. Net sale decreased 1%, excluding the impact of $41 million of unfavorable foreign exchange and acquisition sales of $88 million, organic net sales decreased 7.3%. Organic sales were significantly impacted by lower replenishment orders due to higher retail inventory, softer demand for certain categories, and the unfavorable weather conditions. Gross profit decreased $19 million, and gross margins of 32% decreased 210 basis points, driven by fixed cost absorption from the lower volume increased costs from unfavorable impact of foreign currency, and continued higher short-term supplier-related costs. Price largely offsets commodity and freight inflation in the quarter. SG&A expense of $221.9 million decreased 12.8% at 29.6% of net sales, with the decrease driven by the impact of cost reduction initiatives, lower project spend on integration, and lower variable incentive and stock compensation compared to the prior year. Operating income increased to $16.4 million driven by the decline in the SG&A I mentioned and a one-time $3.5 million remeasurement in the contingent consideration associated with the TriStar business acquisition. Our gap net income and diluted earnings per share decreased due to higher interest costs, foreign currency losses, and higher income tax expense. Adjusted diluted EPS increased 26.3% due to the increase in operating income. Adjusted EBITDA decreased 5.6%, primarily driven by reduced sales volume and unfavorable currency impact, with positive pricing offsetting margin pressure from commodity and freight inflation. Turning now to slide 13, Q4 interest expense from continuing operations of $27 million increased $6.9 million. Cash taxes during the quarter of $7.3 million were $2.2 million higher than last year. Appreciation and amortization from continuing operations of $22.7 million was $6.9 million lower than the prior year, and separately, share and incentive-based compensation decreased by $8.8 million. Cash payments toward restructuring, optimization, and strategic transaction costs were $31.4 million versus $19.4 million last year. Moving to the balance sheet, the company had a cash balance of $244 million and approximately $342 million available on its $1.1 billion cash flow revolver. Debt outstanding was approximately $3.2 billion, consisting of approximately $2 billion of senior unsecured notes, $1.1 billion of term loans and revolver draws, and $93 million of finance leases and other obligations. Additionally, pro forma net leverage was 5.4 times at the end of fiscal 22, which is consistent with the previous quarter. Capital expenditures were $18.7 million in the quarter versus $17.4 million last year. Moving to slide 14 for an overview of four-year continuing operations results, net sales increased 4.5%. Excluding the impact of $94.9 million of unfavorable foreign exchange and acquisition sales of $225 million, organic net sales were essentially flat. The sales performance was driven by poor weather impacting category sales for our home and garden business, while home and personal care was impacted by post-pandemic category demand softness during the second half of the year and aggressive inventory reduction actions by retailers in response. This was offset by growth in our global pet care business. Gross profit decreased by $44 million and gross margins of 31.6% decreased 290 basis points driven by commodity and freight inflation and unfavorable currency impact, partially offset by favorable pricing and improved productivity. Pricing lagged inflation during the first half of the year. Adjusted EBITDA decreased 27.7%, primarily driven by the gross margin decline, unfavorable currency impact, and higher operating expenses due to inflation and increased supply chain costs. Now let's get into the review of each business unit to provide detail on the underlying performance drivers of our operational results. Let's start with home and personal care, which is slide 15. Reported net sales increased 11.5%, mainly due to the acquisition of TriStar. Excluding the unfavorable foreign exchange impacts of $24.8 million, organic net sales decreased 9%. The organic net sales decrease was driven by category decline from lower consumer demand, particularly in kitchen appliances, and retailer inventory reductions. Sales are also lower in personal care appliances, However, garment care posted double-digit growth as post-pandemic recovery continues and would continue to win market share. Sales were also helped by favorable price in the quarter. Although retailers continue to work down inventory, it remains higher than targeted. The slowdown in consumer demand coupled with high inventory are most severely impacting the North American markets as retailers continue to order below POS. The EMEA region sales decline was primarily driven by the unfavorable impact of FX. Net of FX, personal care appliances, and garment care categories registered growth, but the kitchen appliances category still remains challenged. On a brighter note, our Latin American business continued to show strength and posted double-digit growth driven by higher consumer demand and expanded distribution. The overall macroeconomic environment remains challenging, but our products continue to perform well with consumers compared to our competitors. In fact, we have gained share in the garment care category as our steamer sales more than doubled versus last year and resulted in a 250 basis point share gain in the US, helping us to continue to build on our number one US market share position. We continue to launch new and innovative products to drive consumer engagement and excitement. Recent examples of such products include our George Foreman Submersible and Beyond Grill products, Remington's Flexistyle range of hair appliances, and several new Air Fire products under the Russell Hobbs, Power XL, and Emeril Lagasse brands. Adjusted EBITDA increased 93.1% to $28 million due to growth from acquisition, favorable pricing, and the impact of synergies and cost reduction actions initiated during the previous quarter. Inflation and incremental short-term demurrage and detention costs continue at a reduced rate, but are now offset by pricing in the quarter. EBITDA was also negatively impacted by the unfavorable FX impact and volume decline. As we look forward to our fiscal 2023, we expect retailer inventory and ordering to return to a more consistent trend to POS starting in the second quarter of fiscal 2023. This will also help us continue to reduce our inventory throughout the first half of fiscal 23. As we sell off some of the higher cost inventory from fiscal 22 during the first quarter, our profitability will be adversely impacted. Although we are anticipating a challenging first quarter, we expect the business to grow profitability in the second quarter. The TriStar business integration is continuing at an accelerated pace. and we expect to substantially complete the integration by the end of the fiscal second quarter. Commercially, our focus will be to drive fewer, bigger, better consumer-relevant innovations that enhances our current market position. Now let's move to global pet care, which is on slide 16. Reported net sales decreased 5.2%, while organic net sales increased 0.2%. Higher sales in companion animal were offset by continued softness in aquatics and our skew rationalization efforts. Sales were also helped by favorable pricing in the quarter. With the close of this quarter, we recorded our fourth consecutive year of organic sales growth. Companion animal sales, particularly consumables, continue to show growth across geographies as favorable pricing more than offset unit decline due to slowing category demand. The aquatics category experienced a sales decline as we compared a strong Q4 demand last year, fueled by new hobbyists that entered the category during the pandemic. However, consumables products within aquatics saw year-over-year growth. Our European sales are negatively impacted by translation FX as the dollar strengthened against the British pound and the euro during the quarter. Adjusted for FX, sales continued to grow in the European markets, fight pressure on consumers from higher inflation and the impact of the war in Ukraine. In North America, sales were adversely impacted by higher overall inventory, mostly in the pet specialty channel. Pet specialty retailers carry a much wider assortment of aquatics and other small animal products and are adjusting to new pet acquisition rates, returning to pre-pandemic levels. Our Latin America business posted strong growth due to new distributions. Adjusted EBITDA decreased 9.7%, driven primarily by the impact of lower volume and unfavorable FX. Q4 EBITDA benefited from additional North American pricing actions that were implemented in Q3. With this new pricing, we are now largely offsetting input cost inflation. EBITDA pressure from volume decline was further mitigated through operating cost reductions, including the benefit of fixed cost reductions initiated during the third quarter. Overall, we remain bullish that we will continue to experience positive business momentum in fiscal 23. The team is particularly excited to see the ongoing growth and share gains in the nutrition-based products in the portfolio. The operating fundamentals within the business have improved greatly, as evidenced by North American service levels reaching their highest levels in two and a half years. Additionally, we have completely recovered the supply for our critical choose category items after almost a year of disruption of supply from Asia. The GPC team remains focused on the execution of our long-term strategy, which is centered around inspiring more trust through the delivery of unique and innovative products in order to drive demand for our portfolio of leading brands. Our pet business is a historically recession resistant business with tremendous upside potential, which is just another reason why we remain bullish about the continued growth of this business. Finally, let's turn to Holtman Garden on slide 17. Fourth quarter reported net sales decreased 19.4%, showing a decline across repellents, driven by a decline in category sales due to consistent unfavorable weather conditions. Although we paced with the pest control category, overall category POS was a challenge this season. Controls outpaced the category, while household and repellents were slightly behind the category. Sales in household insecticides declined compared to last year, where sales were helped out by out-of-stock of competitor products. Retailer inventory was high coming into the fourth quarter due to slower POS from hot and dry conditions throughout the third quarter. To help clear out end-of-season inventory, highly targeted conversion tactics were utilized to help drive POS sales. Retailers also experienced lower foot traffic in home centers which adversely impacted the POS for cleaning products. Despite these pressures, we saw dollar growth in Q4 versus last year across our top customers for cleaning products. As for product news, the new Flip and Go delivery system, now available in Bug Stop, Bed Bugs, and Weed and Grass Killer varieties, ended the season with over $10 million in sales, continuing to bring in new millennial households in their respective categories. In fact, our spectracide home insect control business is up 29% since the introduction of our flip-and-go delivery system. And Hotshot had a record year, driven by ant, roach, and spider in Q4, which was up 30% versus last year. This season, Cutter's line of personal repellents received several recognition awards from sources like the New York Times Wirecutter Reviews, Forbes Health, and Yahoo News. One of the items, our Cutter Backwoods Dry Aerosol, was recognized as Best Deep-Based Repellent by New York Times Wirecutter and Best Overall Repellent from Orbs Health. Just Adibita decreased 48% in the quarter. Adibita decrease was driven by the lower volumes and related fixed cost absorption impacts. The business continues to see higher product costs from raw material and freight but pricing now covers inflation in the quarter. Although we are seeing the benefits of fixed costs restructuring and operational cost reduction actions initiated during the previous quarter, the EBITDA decline from volume is outpacing these savings. We are initiating limited further price increases in fiscal 23. Clearly, we are not pleased with the performance of our H&G business this last year. While we remain confident in the long-term growth of these categories, our business needs to be more resilient throughout the weather cycles. We must also further our strategy of growth in the cleaning categories to level out the seasonality and simplify the business overall. We are confident that our strategy will be successful and of the new leadership we have brought in to execute it. In addition, while we took meaningful cost actions in the business in the third quarter, we have identified further opportunities to run the business more efficiently and improve profitability. We are also developing a more robust S&OP process to better manage the seasonality and its impact on our manufacturing footprint. We are capturing meaningful distribution gains in 2023, and our retail customers continue to stay focused on both cleaning and pest control for the coming years as these consumable categories become more relevant to repeat high velocity purchases. Let's now move to slide 18 and our expectations for 2023. As David mentioned, we expect low single digit reported net sales growth in 2023, with foreign exchange expected to have a negative impact based upon current rates. Adjusted EBITDA is expected to grow low double digits despite some inflation headwinds, which are offset by the annualization of current pricing actions and planned further price increases. as well as additional productivity actions and the benefits of our cost reduction actions. From a phasing perspective, we expect first half and specifically the first quarter to be challenging as the demand continues to settle at a lower post-pandemic level and retailers continue to reduce their inventory levels. First quarter profitability is also negatively impacted as we sell through some of our current higher cost inventory. Turning to slide 19, depreciation and amortization is expected to be between $110 and $120 million, including stock-based compensation of approximately $15 to $20 million. Full-year interest expense is expected to be between $110 and $120 million, including approximately $5 million of non-cash items. Cash payments towards restructuring, optimization, and strategic transaction costs are expected to be between $50 and $55 million. Capital expenditures are expected to be between $60 and $70 million. We ended the year with approximately $740 million of usable federal NOLs and expect to use substantially all of them to offset the gain on the sale of HHI. We are projecting to be a US taxpayer once the HHI transaction closes. Cash taxes are expected to be between $30 and $40 million. And for adjusted EPS, we use a tax rate of 25%, including state taxes. To end my section, I want to thank all of our global employees for their strong efforts during these challenging economic times. And I'm confident that we have the right actions in place to navigate these headwinds. Now back over to David.
spk00: Hey, thanks, Jeremy, and thanks, everybody, for joining us today. We've covered a lot, and I'd like to take just a couple minutes to recap the key takeaways, and these are found on slide 21. First of all, our fourth quarter financial results conclude a very challenging fiscal 22 for us, where we saw sales pressure from changing consumer dynamics, short-term customer inventory actions, which drove significant top-line pressure in the second half of the year. However, we proactively took swift actions to prepare the company for leaner times as the demand started to slow down, but the sales decline outpaced our cost actions in the short run as consumer demand declines were compounded by retailer inventory reductions. We expect some of these difficult dynamics to continue in fiscal 23, And we are therefore pivoting the operating strategy from expansion and increased investments to running a much leaner company that's focused on fundamentals, free cash flow generation, and debt reduction. Second, we have shifted the operating strategy of the company towards a leaner business built around four key pillars. First, we are streamlining the organizational structure and re-energizing our employee base. Second, we are increasing operational efficiencies and limiting risk. Third, we are protecting and deleveraging our balance sheet and strengthening our liquidity position. Fourth, we are transforming our company into a pure play pet and home and garden business with faster growth and higher margins pro forma. Third, although we expect a difficult macroeconomic environment to continue in fiscal 23, we have taken all the right actions to set ourselves up for success. As referenced earlier, we are targeting low single-digit net sales growth and low double-digit EBITDA growth for fiscal 23, and we expect to reduce our leverage by generating free cash flow through improved operating performance and working capital management. Last, we expect to win the DOJ lawsuit and close the HHI transaction by no later than June 2023 and collect $4.3 billion of cash. Despite the short-term challenges, I remain optimistic about the future of our company and I believe we're well positioned to execute on our operational goals and generate significant cash flows in fiscal 23. I'm also confident that we will execute on our strategic goals and deliver significant value to our shareholders. For these reasons, I'm very excited about fiscal 23, and I'm looking forward to updating you guys in subsequent quarters. Before I close the call, I do want to thank all of our employees. who've been working diligently through very difficult times to ensure we've set our company up for long-term success. I am grateful to all the sacrifices of our Spectrum Brands employees and all the sacrifices you've made to help navigate our company successfully through the past couple of years. I thank everyone for your time. I thank you for your continued support. I'm now going to turn this call back over to Faisal for questions.
spk01: Thank you, David. Michelle, we can now go to the question queue, please.
spk07: If you'd like to ask a question, please press star 1-1. Our first question comes from Bob LeBic with CJS Securities. Your line is open.
spk04: Good morning. Thanks for taking our questions. Hey, Bob. Hey. So just to confirm one thought, and then I have a question around that, but it sounds like obviously there's still impact from inventory restocking issues and all that. How long does that take to work through? Was it implied that that's more of a first half issue and then we should return to more normal in the second half, roughly?
spk00: Hey, Bob, I'll take it. Look, as I sit here today, I'm feeling good because I got six weeks left of this fiscal Q1, and I got six weeks left of moving out the bulk of this high-cost inventory. So, I view it as kind of one-time items because I look at kind of when in my life has freight gone from kind of $3,000 a container to $24,000, and that stuff had to get attributed and capitalized to the inventory that was acquired. And so, yeah, we've been very deliberate kind of starting in May to really get the cost structure of our company down, take the fixed costs of running the business much lower, kind of going into what I believe is a recession, and and then frankly just being pretty aggressive on liquidating the high-cost inventory. And so we made really good progress with that. I hope you can see that it's not just me talking positive on a conference call. We actually got $100 million of that inventory out in the quarter that we just completed in September, our fourth quarter. We're going to make more progress on that this quarter. That is going to suppress the EBITDA production. Our earnings are going to be subdued as we liquidate that high-cost inventory line. But I think that that's the right decision to make, kind of take the pain on the front end. My personal perspective is we've already pivoted the balance sheet. And so while December is usually kind of a use of cash, it's actually going to produce cash this year because we're going to get inventories further down. But that is going to have a negative impact on the EBITDA earnings in Q1. We think we can manage it. We don't think it's going to be horrible. But, yeah, we want you to understand the phasing is that we're going to pivot – While we believe we've pivoted the balance sheet already, it'll take us until Q2 to really pivot that P&L and get the earnings going in the right direction. Jeremy, you want to?
spk05: Bob, I'd just add, I think that is more of an issue just with HPC and with home and garden for different reasons. With global pet care, that's less of an issue, perhaps a little bit in pet specialty. And then I'd just add, look, three of our top five customers reported this week, and you know, my net takeaway from those three earnings reports was positive as it relates to getting through this inventory and getting to a better place. So overall, I agree with David. We're feeling pretty decent. I think in HPC in particular, it probably takes towards the middle of the fiscal second quarter to see retail inventories more normalized and see that, you know, POS pulled through to replenishment.
spk04: Okay, great. No, that's super helpful, Culler. And I guess kind of just taking it a step further from that, if I did the math real quick, the implied guidance given all of these headwinds is about a 10% EBITDA margin, which is not the normalized margin. Can you give us a sense of what you think the margin profile will be once we get past this kind of noise?
spk00: Look, I think let's start with our two bigger businesses, right? We're trying to become a global pet and home and garden company. both of those businesses should be 20% even in margin businesses. They just should. And so we've gone through a lot of turmoil with the pandemic. We've gone through a lot of inflation, and then obviously our pricing lagged the inflation, which is subduing the margins, and now you've got this I call it – it's kind of like the last bit of the backwash from COVID-19 where you've got this high-cost inventory. You've just got to move off the books. But I think you'll start to see some clarity around real margin improvement, you know, in Q2 and then beyond in those businesses. I think Jeremy's point was very good in terms of, look, the appliance business is more durable in nature. and it's just going to take a longer time to kind of work that off and see that margin structure rebound. And obviously we're in sell mode on HHR, and we're looking forward to winning that DOJ lawsuit there.
spk04: Okay, super. And I guess last one for me, I'll jump back in queue. Just, you know, obviously we're talking a lot about, you know, kind of the near-term stuff. Just give us a sense in terms of how you're looking – market share-wise and price realization, new product introductions, those kind of things for next year, kind of the more traditional focal points for your outlook for the coming year?
spk05: Yeah, I would say I'll start with price. So I think as you heard in our prepared remarks, we're a little more laser-focused in certain areas versus broad-based given the lower level of inflation that we expect in F23. And, you know, When we say that, be careful. We have to think about the timing of when we've actually incurred that inflation. Most of the inflation that we will recognize in our P&L, really all of it, in fiscal 23 is actually incurred in Q3 and Q4 and capitalized on the balance sheet at the end of the year. So Europe is a challenge. Transaction FX is a real challenge for both HPC and GPC with the strengthening of the dollar, obviously eased. a bit here in the last couple of weeks, but it's still a significant year over year headwind, partly from translation, but more from transaction. So we have to continue to get additional price there and look for additional costs, frankly. On new product introductions, I totally agree with you. In the broader parts of our markets, particularly the North American markets where we've had to take so much price over the last couple of years, The real opportunity on margin is around new product introductions and scaling up and how do we move the needle forward on price points with those. And that's a key part of the strategy, and that will continue. And I think we have a nice set of new product introductions across the businesses. I mentioned a few of them in my prepared remarks, but I think we're pleased with the progress there, though we have more to do in the future, certainly. Okay.
spk00: Yeah, I think, look, let me add to it just a touch. I was recently, I've been traveling a lot into the different factories and facilities as we try to get our fixed cost structure down. And, you know, I'm really thrilled to have kind of Dave Gabriel running S&OP and everything we're doing there at Working Capital. I was recently in the Blacksburg facility. and met with the R&D team there. And, look, we have just a lot of great stuff coming. I prefer to kind of just push that to Q2 and look forward to talking to you there. But we've got a very robust portfolio of brand-new products that I think are wildly complementary to our existing portfolio, but I'd rather get closer to them being commercialized and then be able to share that with the investment community. But a lot of good things going on.
spk04: Super. All right. Thank you so much.
spk00: Thanks, Bob.
spk08: Our next question comes from Chris Carey with Wells Fargo.
spk07: Your line is open.
spk02: Hi, good morning.
spk05: Morning, Chris.
spk02: Jeremy, can you perhaps be a bit more specific about, you know, the Q1 headwind that you're looking at? Yeah, I guess, you know, I'm even looking at, you know, the Q4 delivery and appliances. And if I just, you know, annualize that going forward, which I know there's seasonality in that business, but I'm getting to potentially an EBITDA that is already in line with your guidance just based on that business alone. So is that business going to take a real step back? Q1, the other businesses as well. I appreciate the commentary on Q1 and the full year, but any sort of like specificity would be helpful.
spk05: Sure. Yeah. So interesting situation with the HPC business. It was really around the end of, the latter part, I should say, of Q3 and the first part of Q4, where we were experiencing our most significant inflation, particularly around excess containers causing detention and demurrage costs, as well as our need to get overflow distribution space. And so most of those costs, and they're significant, they were actually on the balance sheet at 930, and they'll be flushed through in Q1 mostly, some in Q2. across the whole company, I think David mentioned in his prepared remarks, that's about $55 million of capitalized variances that are in excess of our current standard costs that sit on the balance sheet that will flush through the P&L, probably about 70% of it in Q1, and most of that in HPC. And that's why I referenced the sequential reduction in inventory, or I'm sorry, in EBITDA and HPC, because I agree that would not be our typical seasonal pattern. The good news is that is behind us. It will be a little bit in Q2. We actually do expect to grow profitability in HPC in Q2. And, you know, unless something big changes from a macro perspective, it will be fully behind us in the second half of the year across the businesses.
spk02: Okay, I understand. And so, in excess of that, just to, again, clarify the drivers of the outlook, excuse me, the demand, you know, I think David mentioned that the phasing is due to demand that's lower post-pandemic. Retailers continue to reduce inventory. And then, obviously, you're selling through the higher-cost inventory. And I'm just trying to assess visibility here. You know, the higher-cost inventory, I appreciate that flows through. But can you just comment on your visibility for guidance after Q1, just in the context of demand lower post-pandemic, tighter inventories at resales? Do you feel like you're in a place where you have enough visibility on where retailer inventories are that by Q2, you should be in a better place? If you could just frame that, I think that would be helpful.
spk00: Let me take a crack at it, and then Jeremy can fill in the blanks. Look, our pet business is predominantly consumption-driven business now. And we continue to see positive POS there, as I sit here today. And, you know, while pet adoption, you know, is down, that installed base from the pandemic is still big. And we're also taking market share. So what I can tell you is, you know, Pet is our biggest pro forma business. While we definitely see, you know, things like high-priced aquarium, you know, fish tanks and the durable components of it are down, we believe we can grow through that given that, you know, we're more consumption-weighted and we've got a lot of new exciting products, you know, coming out that we'll talk to you about, you know, next quarter. Home and Garden, you know, had... I think the perfect storm in, you know, to say fiscal 22 is a challenge is, you know, it's an understatement, right? I mean, and so, you know, we're very happy to be kind of through, you know, warehouses being full, product, you know, us having to get second and third places to store product to try to just meet the PO demand from retailers. That expense base should shrink as we try to get back into four walls of a lower manufacturing footprint. We require less distribution. Warehousing is going to drive those expenses down. But I can also tell you that we gained distribution in home and garden going into this fiscal year. And, you know, I think we had the worst weather year in a long, long time for that business. And I know that the street hates hearing about us blaming weather, but it really did wreak havoc. on that H&G business, and so I'm actually pretty bullish about Home and Garden getting some nice growth in fiscal 23 as well, and obviously the margin structure rebounds as we shed some of those costs that we incurred trying to meet all the demand from our retail customers. Jeremy, you want to fill in there?
spk05: Yeah, I think in HPC, you know, agree with David's comments, and then in HPC, look, I think we We do have good visibility to retailer inventory. I mean, these are our customers. We work with them every day. The big question mark is kind of what happens with the overall both European and U.S. economy. And so, you know, I think we've been fairly cautious in how we forecast at the top line. But, you know, we all have not figured out yet whether this is going to be a soft or a hard landing. We don't know where the war in Ukraine is going. And so we think this is prudent what we put out today based on what we're seeing. and what we can see in retail or inventory, and we'll see what happens as the year progresses.
spk00: Yeah, also, listen, let me also tell you, I think, you know, if you look back to 2008, you know, we actually were able to grow these businesses. Home and garden and pet tend to be pretty recession resilient, and so we do take some comfort in that. And quite frankly, we see some trade down occurring, you know, at the world's largest retailer, and I think that actually benefits our appliance business as well.
spk02: Okay. Thank you both.
spk08: Thank you.
spk07: Our next question comes from Ian Zuffino with Oppenheimer. Your line is open.
spk06: I agree. Thank you. You know, just as a guide, can you, you know, I know you talk about pricing versus inflation, but maybe can you talk about what like absolute pricing is? is up in guidance you know versus volumes or maybe just kind of touch directly on that and you know maybe segments that imagine hpc prices the highest pricing because of the inflation but um you know any kind of color there would be really helpful thank you yeah i mean so let's let's think about kind of compare and contrast the two years right so in f-22
spk05: you know, we had to give price in the neighborhood of $250 million, right? And we were able to get that and recognize it in the year. We are in a different environment now. And as I said earlier, it's more targeted. So I would actually expect our overall pricing across continuing operations to be low single digits for the full year. And, you know, where in that range of low single digits really will depend on what continues to happen with currency. I feel like From a commodity and a freight perspective, things have stabilized, you know, at least much better than they have the last couple of years, back to a more normalized pace of change, barring any geopolitical activities that happen. Does that help you?
spk06: No, that's very helpful. Thank you. And, you know, on HPC and the spin, can you maybe give us an update there? Maybe the timeline, how are you thinking about it? Is it predicated on getting this HHI deal done? You know, you're going to have to wait for it to close, and then you proceed. How are we thinking about the timeline as it relates to that HPC spend? Thanks.
spk00: Yeah, you're definitely correct. We've got to focus and close HHI, and then we've got to deal with HPC after that.
spk05: Yeah, we continue to work internally to separate the business and be prepared, be ready to go when the time comes. Within the business, we've done a good job there. I like the progress we're making, but I agree with David. We'll focus on HHI as our first priority.
spk06: Okay, thank you very much.
spk05: Thanks, Ian.
spk08: Our next question comes from Peter Grom with GBS.
spk07: Your line is open.
spk03: Hey, good morning, guys. Hope you're doing well. So can you just maybe give us an update on the HHI transaction? I'm not really sure what you can share given the situation, but just any thoughts on next steps? Is there a chance in your view that we're not going to go to trial here? Just any thoughts around that? And then, you know, David, I know you've remained confident in this deal closing for some time. So, you know, maybe just help us understand why you remain so confident, just kind of given where we are with everything that is going on.
spk00: Thanks. Yeah, thanks, Peter. Look, the HHI deal, the original deal, is a good deal. And in my opinion, it is good for the American consumer to have ASA run this business. And so I view the original deal as not being anti-competitive in and of itself. I think the original deal was just fine and should have closed. I think the current construct with the remedies that are being offered increase my confidence in that based on the law in this country. My advisors, my legal team is very, very confident that we will win against the DOJ. These things take time and I can't give you a great you know, estimate on, you know, when that is. I can just tell you, hey, my drop dead date is June, and we believe we can get it closed by the end of June or before.
spk03: Got it. That's helpful. And then I guess I kind of wanted to ask a follow-up to Chris's question earlier, just on the outlook. But, you know, can you maybe just help us frame, you know, the confidence? Is there any sort of conservatism embedded in the outlook? Just because, you know, the You know, I think what Chris was alluding to is just kind of the lack of visibility and kind of two straight quarters of, you know, missing expectations. So just I think people are trying to understand kind of the confidence, if you will, in this kind of, you know, 311 to 320, you know, number.
spk00: Look, I think if I could ask, if I could talk directly to our shareholders, here's what I would tell you. I think strategically we are absolutely on the right track to create a stronger, faster growing, higher margin business called Pet Home and Garden. We clearly did not anticipate a DOJ lawsuit. When you talk about the quarterly progression, actually if you pull your model up right now and you look at our earnings over the last four quarters, We actually, despite being a little softer because of some FX that I originally thought was Q4, we almost comped in line EBITDA year over year in the fourth quarter. The fourth quarter, despite all the problems, was actually our stronger quarter in terms of how it relates. If you look at Q1, Q2, Q3, and Q4 of fiscal 22, we actually claimed closest to the goalpost with the quarter we just reported, despite all the headwinds. The reason I'm super bullish And why I think you should own our shares and buy shares at today's level is because I've tried to tell you, and I guess the market doesn't seem to price in the fact that HHI is going to close. But, you know, I've tried to be very transparent that in the event that for some unlikely reason HHI doesn't close, we're going to collect cash of over half a billion dollars this year. So that's over $12 a share, guys, in cash that we're going to collect here in less than 12 months. So I don't think that's horrible, and that gets our leverage back down to five or less. My base case, which is the highest probability based on the information I have today, is that we're going to close HHR and collect $4.3 billion and completely redo our capital structure. And so if you do the math, and you take a market cap of south of $2 billion and you close HHI, you're buying pet EBITDA at somewhere around four times EBITDA. And I think that's wildly attractive as a shareholder. But I get it. Until we close HHI and we deal over the balance sheet and buy back stock, I'm in a show-me phase. But I think we are a very deep value security company. and we have numerous catalysts on the horizon. And so I'm actually really excited to put 22 in the rearview mirror and steer us to a much healthier, much profitable, more profitable 2023.
spk05: And I would add, Peter, I just think, you know, as you look at the outlook for continuing operations, you know, I always think about at the start of the year, what are my variables on top line and what are my thoughts on variables on the bottom line? And as we enter Fiscal 22, clearly we experienced significant increased cost as the year progressed versus what we expected. That's my definition. I've got $120 million of capitalized variances on my balance sheet at 930. That means that my costs were $120 million per inventory return higher than I expected. That's a huge number. As we enter 23, I feel very differently. Our current costs are lower than what's on the balance sheet right now and are more stable than they were a year ago With the exception obviously of the currencies I talked about for the businesses that are buying from Asia and selling in in pounds and euros Then you move to the top line. I mean obviously again, you know home and garden HPC in particular You know, we experience significant declines in top line versus what we expected as we started the year You know as we enter this year You know for appliances You know, really the challenges in that market, you know, started in April, May, you know, based on what we heard from our retail customers. And so they've kind of been in a darker place from a consumer demand perspective for a while. And we're essentially, you know, assuming a fairly consistent level of consumer and customer demand as we go through the year. We've done the same thing with GPC. And home and garden, we really have to use our experience based on, you know, 20 plus years in the business of the team to to figure out what level of moderate recovery we can see after what is the worst weather year that they've ever had. And so none of those are exact sciences, but I think we've taken a prudent approach to start the year. And we will update you as we always do on anything that changes each quarter as we progress with earnings. Got it. Thanks so much.
spk07: Thank you. That's all the time we have for questions. I'd like to turn the call back over to Faisal Khadr for any closing remarks.
spk01: With that, we've reached the top of the hour, so we will conclude our conference call. Thank you, David and Jeremy, and on behalf of Spectrum Brands, thank you all for your participation.
spk07: Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.
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