Spectrum Brands Holdings, Inc. (SPB) Earnings Call Transcript & Summary

[Audio Gap] everyone, and thank you for joining us for our next presentation of the day, Spectrum Brands. Spectrum has gone through quite a transformation of late, having divested both its global Auto Care and battery and portable lighting businesses to Energizer a little over a year ago, in order to reduce outstanding debt, which has been cut in half. Today, Spectrum boasts a rather eclectic portfolio of leading brands across Home & Personal, Hardware & Home Improvement, Home & Garden and Pet Care. In addition, the company has embarked on an ambitious Global Productivity Improvement Plan, designed to deliver over $100 million in cost savings within the next 18 months. Here to tell us the Spectrum story is the company's Chairman and CEO, David Maura. Also in attendance is the company's relatively new CFO, Jeremy Smeltser, who joined in late calendar 2019; as well as Vice President of Investor Relations, Kevin Kim. And with that, let me hand things over to David.

Thanks very much. Mic is on? First of all, thanks a lot for coming out. It's an honor to meet you guys, and it's the first time I've attended a Raymond James Equity Conference. So thanks for not canceling. Seems like everybody is nervous about coronavirus. And it's, I guess, the first question that I tackled at CAGNY, so I'll tackle it here upfront, and then I'll -- I typically am an off-script kind of guy, and Jeremy will fix that and keep us in line and bring us with the details. But I am excited to present to you the face of the new Spectrum brands. Starting, basically, over 12 years -- 13 years ago, I bought the company when I was in a different position, and I built it through acquisitions for about 10 years. Did a number of strategic acquisitions, bolt-ons, and we basically built the business from less than $700 million of market cap up to about $8 billion, and we were compounding money at about 30% a year for almost a decade. We had some operational difficulties in April of '18. And that's when I stepped into my new operating role as the CEO of the company. I've previously just been Chairman. And I basically built an entirely new C-suite of which Jeremy Smeltser and Kevin Kim are a part, and sold off a couple of assets. And so effectively, in the last 18 months, we sold off 2 businesses for about $3 billion. We paid off over half our debt, paid down about $2.5 billion of debt, and effectively brought our leverage ratio, got up to about 6x to about 3.1x leverage. So we got our balance sheet healthy, we've got a lot of liquidity and turned my attention to operations. And so I spent the first year kind of learning more than I ever wanted to about standard cost accounting inside of a bunch of production facilities and distribution centers. Promoted Randy Lewis to be the COO of the company. And quite frankly, we've got a pretty strong and exciting management bench right now to take the company forward. As -- in the introductory remarks, I mentioned the Global Productivity Improvement Program. We kicked that off about a year ago, a little more than a year ago with our partners at [ A.T. Kearney ], and so far, we've identified about $100 million of run rate savings. And I'm thrilled to report to you that we're on track for that, and hopefully, we can update that as we move forward to more aggressive numbers. As we sit here today, as I referenced the coronavirus, I'll tell you what we told the folks at CAGNY. Yes, it's impacted our supply chain. But as of this morning, the latest update I got out of China, and we post China daily, we're about 96% back up in China. China is going back to work. And right now, we're just focused on the suppliers of our suppliers, the next derivative behind them to get our throughput all the way back up to where we want it to be. We're thinking about 30 days, we'll be back to about, hopefully, 100% of our total production out of China. We mainly source our appliance business out of China, and we do some hardware as well. So look, in 2019, it was the first year that I -- in my new role as CEO, I can tell you, we did what we said we were going to do. We delivered $567 million in EBITDA, which is the midpoint of guidance. We did get 1.4% organic growth. We are a shareholder-friendly company. We returned $350 million to our shareholders with repurchases and dividends. And entering this year, we executed $125 million ASR, or accelerated share repurchase program, and we've repurchased $81 million of stock through open market purchases as well. I will -- I'll get to more details here in a minute, but I hope to convince you that we are an excellent investment opportunity. We've told The Street, we'll do $240 million to $260 million of free cash flow this year. And we're already basically half through -- halfway through our fiscal year, which ends in September, and we aim to materially increase our free cash flow production as we get into fiscal 2021, which starts in October 1 of this current calendar year. And so if you look at our stock market capitalization, it was $2.5 billion as of this morning, driving here. I think producing $300 million of free cash flow approximately, next year is a very good free cash flow yield, and we hope to make you a lot of money if you choose to partner with us as shareholders after our presentation. But we've always believe free cash flow generation is the best way to create long-term wealth, and we're getting back to the business of doing that. Very briefly, let me give you an update on the company. We have 4 new -- we have 4 business lines, we have 4 operating companies inside of Spectrum. One is our HHI division, which on the front page here, you see hardware, that's Baldwin. It's a luxury -- a door lock company. It's Kwikset, which is the #1 lockset in the midpoint price point business. Price Pfister is our plumbing unit. And we also own the Weiser brand, which is a dominant market share player in Canada. To the right of that, you can see our pet products business, Tetra is our fish flakes. We do Aquatics business here. We're about 2/3 Companion Animal right now. DreamBone, SmartBone are basically rawhide alternatives. We have a patented meat in the middle. If you have a dog at home, you need to leave this conference and buy a DreamBone and a SmartBone, and make Fido happy. It's an incredible treat. Dogs love it. And if your dog happens to make a mess, we have Nature Miracle. Nature's Miracle is an amazing cleanup product for your companion animal and actually works. To the right of that is our Home & Garden business. We have Hotshot, Black Flag. We have Cutter and Repel under mosquito category. And then we use Spectracide, which is a lawn and garden weed killer. It's very similar. Its efficacy is same or better than our Roundup competitor and Roundup is in the news for using glyphosate, which may or may not cause cancer, but apparently, it gets a lot of settlements. And we do not have glyphosate in our Spectracide. So if you want a glyphosate-free product that kills weeds, safer for your home, safer for you, your pets, your animals, you want to use Spectracide this spring on your weeds, instead of the Roundup stuff that Scotts sells. And then, if you keep going along, that's our appliance business. We have George Foreman, we have Black & Decker, Russell Hobbs and Remington. We signed a big deal with Manchester United in England last year. We marketed Remington, and that business grew 9% in Europe, just this past December. That business was materially underperforming. We replaced the entire management team about a year ago, and that business has now returned to growth from a top and bottom lines. I got to speed up here and give Jeremy more time. But -- so this is the breakout of the business. We're about a $3.8 billion pro forma company. I mentioned $567 million in EBITDA. Our biggest unit is Hardware & Home improvement. And I like the 10-year yield right now. I think that's really good for Hardware & Home improvement going forward in terms of mortgage rates. Pet Care is on fire. We've got an amazing team led by John Pailthorp there, JP, we call him. That team is enthusiastic. I just came back from a pet show last week right here in the wonderful city of Orlando. And we've just got a lot of new product innovation come and a new product pipeline, and we think we're going to bring a lot of news and excitement to our retailers there. Home & Personal Care, I mentioned, that's the George Foreman, Russell Hobbs, Black & Decker portfolio and then Home & Garden there as well. So that's the breakout of the business. Obviously, I was much more internationally focused before the divestitures with Rayovac and STP and Armor All. Those are now out of the portfolio. And you see, we have a very heavy concentration here in North America, 74% of sales, given the today's external events, I like the North American focus. You can see, I only have $122 million of revenue going out to Asia. And we're fixing our sourcing as we speak. These are our top 15 brands. And inside of some of these portfolios, we have some brands that are growing 20%, 30%. So underneath here, the core is very, very healthy. We continue to put more dollars behind that. That's been the main focus of my tenure here. It's been allocating capital internally, more efficiently, in R&D, new product development, innovation, to bring vitality to our finished goods mix and bring news and excitement to the consumer. I won't go through all this, but this is basically the culture of the company. I believe if you get the culture right, you can do anything. We're a strong brand house. We have exciting innovation. We're a low-cost producer. And that's the flywheel of how we run our business, how we treat our people, how we treat our customer, it's focus on sustainable free cash flow growth. This is the leverage reduction we did last year. This is the current state of the business. And this is the cash we returned to our shareholders. I've changed the leverage ratio here, 3.5 to 4, because we are in the market buying back shares. And we intend to continue to do that. We believe our stock is materially undervalued and the best use of our cash is buying our own shares. We do own a large stake in Energizer. And obviously, that can be a source of liquidity for us in the future, if we so choose. So global productivity improvement. Basically, this is actually just getting much more efficient. This is not about reduction in force. This isn't about just eliminating heads. This is basically about getting upgraded talent, really going to market better and basically just trying to increase yield on every dollar spend inside the company. This has been my main focus. You see on here, Halo is a new product. It's biometric locks. We launched that at the CES show. We won #1 for it. Glofish, we just introduced the Bettas fish. We do not inject that fish with uranium. We use DNA from coral in the natural world, and we're able to create a fish that glows. I'm still challenging my team to come up with a hammerhead shark that glows because I want that in my own house. But right now, we just have these Bettas, and we just launched them last week, and the initial POS is fantastic. So if your kids want a fish that will basically live longer than Nemo and glow all night long, you need to get yourself a Glofish. We have a new Smokeless Grill coming out with George Foreman. We're putting a lot of dollars on that and driving sales that way. And again, we're now introducing ESG. We're trying to get more efficient with the resources we manage. So we're reducing our energy, reducing our water. We have a lot of initiatives around the company. We do wells in Africa. We're trying to be very good partners with all the communities around us because we want to be good, socially and environmentally responsible. With that, let me introduce Jeremy Smeltser. I got to thank Jeremy for coming on board. He's hit the ground running. He is really a central focus, a key to our Global Productivity Improvement Programs and he's got a lot to do. So let me give them the stage and take it away.

Thanks, David. It's good to be here with you. My first time at the Raymond James Conference as well. I've been a long time public company CFO in an industrial land with SPX and SPX FLOW over the last few years. I'm just going to run you through the businesses in a little more detail, talk about some of the initiatives within the Global Productivity Improvement Program that we're most excited about, which to David's point, I completely agree. Not so much about cost-cutting as is about adding organizational capability in the right way. So first, our HHI business. Unique collection of home improvement segments, market-leading brands, significant penetration in multichannel distribution are the key to win here. So security, the largest segment. David talked about where we're at by brand in there. Pfister, obviously, also an exciting product in the plumbing space. It makes us pretty unique. We -- our ability to combine security and plumbing together creates a unique offering to builders. So we actually just signed the largest new contract in the Spectrum history of Pfister with Clayton Homes, one of the top homebuilders in the U.S., combining the 2 brands as their exclusive security and plumbing supplier for their prefab division for the next several years. Our second largest business being Home & Personal Care. Revenue, just over $1 billion. It's the most global business that we have. Actually, the U.S. only represents about 40% of the revenue in this business. Our George Foreman brand, I'll give you a little bit more detail on the new product that's coming out actually this month, that we're launching in conjunction with Walmart, very excited about. Black & Decker are the U.S. market leader in fast-growing toaster ovens for several years, and now we've integrated the Air Fryer technology into the toaster oven. We also have the leading U.S. position in garment care, where we occupy the retail sweet spot for price and performance in irons and are carrying that momentum into the rapidly growing segment of handheld steamers, driven by rapid adoption by millennial consumers. Now on to Pet. The Global Pet Care business is about $800 million in revenue. The furthest along our transformation journey, our COO, Randy Lewis, that David mentioned, was running this business prior to his promotion to COO. Now we have new leadership, globally aligned business strategies. They've been in place for the last 18 to 24 months. And this unit has delivered 5 consecutive quarters of revenue growth and 3 consecutive quarters of EBITDA growth as the transition has taken hold. So in this space, we play in 4 categories: Aquatics, Dog Chews, Pet Grooming and Pet Stain & Odor. And in many cases, we actually have the top 2 brands in the space here in North America. Again, in this space, our shift to globally aligned business strategies and new product development is paying off with innovative products, strong brand support, digital and omnichannel focus and a growing portfolio of IP, driving growth in all 8 of our strategic brands, with over 15% growth in the core, in fiscal '19. And finally, Home & Garden, our smallest unit at approximately $500 million in revenue, but we continue to be very excited about the potential here. This business is highly profitable, with high barriers to entry, and we see opportunity to shift from a value player to a category leader as we continue to invest in innovation and consumer engagement. We compete in outdoor controls, indoor insecticides, an area -- and personal repellents are all areas that we think are cyclical, more resistant to the macro cycles. We have the #1 position in the combined market, at an estimated 27% share, which has steadily grown over the last 6 years, led by Spectracide, which was the only brand in the top 7 that grew last year in the U.S. Again, the story here is long-term focused investments. New business unit leadership 18 months ago, with industry-leading talent and R&D and marketing and spending in R&D will increase over 80% from fiscal '18 to fiscal '20, and an advertising and promotion will increase over 70% during the same time period. Now a little bit more about the improvement areas within the Global Productivity Improvement Program. Commercial operations, which I'll explain in more detail in a moment. GBS, a term that you hear a lot from companies like ours, simplifying, standardizing, automating and outsourcing much of our transactional back office functions, one of my key experience areas. And in procurement, organizational and technology-enabled strategies to allow to leverage our size and continued optimization of our COGS as well as our indirect spend. The latest change we just launched internally is our commercial operations group. So each business unit has its own brand, product and channel strategies, but there are many things that they need to do to support and execute those strategies that are very similar, and we haven't consistently done that well across each platform and each business unit. So to jump-start the innovation in each unit, we've created and launched a brand-new center-led team, legacy talent supplemented with industry expertise that will perform these functions for each unit. Clearly, the advertising and online world for consumer products is evolving faster than it ever has. We have to invest in key areas to compete effectively and drive top line growth. As we make these investments and develop new capabilities to enhance our speed, agility and accuracy, we must do so in a consistent and highly effective way, regardless of the product category or business unit. That's why we're targeting to share these competencies across all 4 businesses in a center-led highly effective leadership group. The 4 pillars of commercial operations will be consumer insights and analytics. So harvesting, aggregating, analyzing and vending data with a strong bias on technology to make sure we're developing new products that the consumers are really wanting. The digital consumer experience of excellence that we use cutting-edge technology and graphics, videography and 3D virtual reality to provide content, e-com operations. So our best and brightest data scientists, led by experienced industry leaders, primarily from Amazon, that set up full assortments, deploy brand protection tools, secure single sources of inventory with retailer sand relentlessly focus on discoverability. And finally, systematize revenue and profit management, creating clear global pricing architectures, optimizing trade promotion spending and deploying technology for efficient ROI analysis and spending adjustment. And then finally, just briefly, a couple of new products. So the new George Foreman Grill -- Smokeless Grill, excuse me, will debut at Walmart this month, 3,600 store in caps and 360-degree digital marketing campaign, several times the size of the investment and the brand over the past several years. We're excited about the product, we're excited about our partnership with Walmart to launch it, building on the growing consumer trend of convenience cooking with speed and quality. And then finally, David already mentioned, the Halo Touch. Again, #1 position at the recent Consumer Electronics Show. It's focused on removing the friction for consumers in the smart lock and home automation space. The first of its kind, and a large-scale provider to allow entry with biometric fingerprint technology. It operates on our SmartKey mechanical platform and is agnostic to technology integration partners. Features a single app control without the need for a smart home integration hub. The homeowner or property manager can add, delete and manage codes from anywhere in the world with Internet connection versus only at the lock. This product should hit the shelves this summer, and our retail partners are just as excited as we are about the launch. Thanks for your time, and I'll turn the call back over to the -- presentation back over to David to wrap up.

Thanks, Jeremy. Again, thanks for your time. Thanks for your attendance. I think my main message to you is, we've been working hard over the last 18 months to reposition our company for growth. We've been planting the seeds of investment in innovation, R&D and new product development. We have a lot of new product wins. Jeremy touched on a very large win we just experienced in our hardware business. We just had material wins in our appliance unit or what we call Home & Personal Care. We have tremendous brands in our Home & Garden business that we're investing in. We've just hired a new head of R&D, and she's already got an amazing new product road map. So we're doing the hard work in terms of getting our company more efficient and providing the company's resources that they need to invest and to grow and to bring exciting products to market, which gives us a better vitality, better margins and healthier growth rates. And we're starting to reap those benefits. I think, look, if I could impress you with anything, if there's anything you take away from what I say to you today, it's this. Even if you just take our $240 million to $260 million free cash flow guidance for this year, and you divide it by our last publicly available share count, which was what?

$45 million.

Call it, $45 million. I'm standing up here, but I think that gets you $5.50, maybe $5.55 of free cash flow. Someone's got a better HP, so obviously it means, you just yell it out. But given my stock price, I think that's a double-digit free cash flow yield. I don't think you'll find another CPG company at this conference or, quite frankly, in my peer group, that has the deep value that we offer you. And we're telling you, we're going to return this company to growth, and we're going to accelerate that free cash flow growth profile. So I think we're deep value equity. I'm looking to expand our shareholder registry. Hopefully, I can convert a couple of you that realize they -- we're actually telling the truth. We're honest guys, doing a lot of hard work. We've laid the foundation of getting a stronger balance sheet last year. We've got tons of liquidity, and we're investing very heavily in our operating units. And so we expect to generate significant shareholder returns over the next couple of years. Organic growth is where we're allocating capital. Again, I think you've clearly taken away from me. If you replay this transcript that we're putting a lot of money into R&D, innovation, new products and advertising as evidenced by our new relationship with Manchester United, advertisement that is not cheap. But we intend to drive growth through further ad spend this spring. We are returning capital to you guys as our shareholder, as our owner/partners. And we are -- I would do tuck-in acquisitions. I just don't see stuff that's cheap. I mean I've looked at very -- I was telling some bankers here earlier before this presentation, we've seen small tuck-ins. Everything trades at 12, 14, 15x EBITDA. And my whole company trades at less than 8x EBITDA. Some of these assets, bankers want me to bid on are single SKU, single brands, $12 million EBITDA-type businesses. We intend to be a $600 million EBITDA company, not too soon. We're diversified. We trade below 8x total enterprise value EBITDA. So I rather bought my own stock here than take care of somebody else's headache. So that's kind of where we're going. We have a strong balance sheet. We are shareholder-friendly. We are driving a significant free cash flow this year. It's going to go higher next year. We've got a lot of NOLs to offset federal taxes. And we're putting a lot of bets on innovation and advertising and promotion. So those are our targets that we've given out, LSD stands for low single-digit growth. $570 million to $590 million is the EBITDA we expect to achieve in '20, and those are the free cash flow guidance that we've given out. And that's the appendix. So I guess Q&A?

Please.

Let's open it up, don't be shy.

If you have to think about geographies that offers more attractive multiples, or maybe is an area that's of interest to you?

Geography?

Yes, meaning that you're predominantly North America now, you showed EBITDA, some exposure in Asia and North America. Is there anything that you're seeing elsewhere that grows more than the multiple is?

I mean any assets that you can definitely get cheaper assets abroad where interest rates are higher and geopolitical risks are higher. Again, we just went through huge change. I mean we literally sold off $3 billion assets, paid down $2.5 billion of debt and that was literally just 13 months ago. So I'd rather just steady the ship right now, continue to invest organically, internally. And again, I don't -- I think even if I looked abroad, multiples are still high. So I would continue to dedicate capital for our own shares and the debt reduction after putting money into the company organically. We're open for business in terms of tuck-ins, in our Pet, in our Home & Garden segments. We'd be open for business in Hardware. And quite frankly, I think the appliance space needs to consolidate further. So what we'll see, what occurs there, but right now, we're just focused on becoming a stronger fundamental player in the appliance and personal care businesses and driving our growth and taking share. So again, my focus for 2020 is organic growth, strategic investment in our core business units and just driving returns for shareholders, so we can gain credibility back and expand our trading multiple. Yes, sir?

When you talk about consolidation in the Home and Hardware, home space and appliances, is that -- do you consolidate it? Or you're trying to take another swing into that business?

Yes. Look, it's no secret. We put the business up for sale, when it was about $145 million of EBITDA, and where the question -- I'll repeat the question because, I guess -- so the question was on the appliance business. Appliances is a lower-margin business versus the other 3. It's a very high free cash flow producer, though, because the CapEx is exceedingly low, and it's a sourced product. I actually -- I started doing consolidation in this industry back in 2005. So I'm starting to date myself. I used to always be the young guy in the room. And I think you're younger than me now, aren't you? So I don't know, I'm getting old. But I've done a bunch of consolidations in appliances, and the synergies that fall out from them was always pretty large, typically $40 million, $50 million, and they weren't exactly hard to get. And so I just think, with today's retail landscape, with e-commerce doing what it's doing, with the omnichannel where it is, with bricks and mortars having consolidated, I think there's too many vendors, there's too many suppliers, all competing for the same shelf space or cloud space or Amazon space or whatever you want to call it. And so quite frankly, I think there needs to be a lot more efficiency. And so we're one of the bigger players. And so right now, if I'm going to sit down and have a negotiation with somebody, I want to be in a strong position. And so my preference is to invest behind my businesses. I just -- Manchester United was a Remington business, that's sitting inside of Home & Personal Care. We're going to put a lot of money behind the new George Foreman Smokeless Grill. We just won listings. I think Jeremy just told you we're going to adopt 3,700 stores in the next 30 days. So we're getting a lot of new wins. So I plan to take share from my competitors right now and get stronger. And when one of them wants to talk to me about making money, they have my phone number. Any other questions? Don't be shy. I'm -- Jeremy is here. Came a long way. We just came in from Wuhan, China. Give free hugs. Any other questions? Yes, sir.

Can you maybe give us a little thought behind that 3.5, 4x leverage, why that's the magical right number?

I grew up a credit guy, and I own a lot of equity personally. And so -- look, there's a lot of my competitors that are 6x levered and they like to sleep at night with that. I don't. I believe our equity is materially undervalued. And so my main focus right now is getting a more diversified shareholder base, making people money again in our stock. And to do that, low leverage typically commands a higher premium in terms of valuation metrics. And so we're going to run a little lower than we have historically. But I think, if we dot our I's and cross our T's, we execute organically, and we shrink our share count, I think, ultimately, math wins over time. So my goal -- I said it at CAGNY, my goal is to stand here, if I'm fortunate enough to be in your company, 12 months from now, I think we'll be looking at $7 a share in free cash. And you divide that by $55 stock price. So I challenge you to call a consumer product analyst on Wall Street and find something cheaper.

Okay. Thanks for your time. We appreciate it.

Right. Thanks for coming. Have a great day.