Spectrum Brands Holdings, Inc.

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.

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.

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.