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

Good afternoon, and welcome to the 22nd Annual CJS Securities New Ideas for the New Year Conference. I'm Bob Labick , President of CJS. We're happy to bring to you the management of Spectrum Brands. Presenting for Spectrum today is EVP and CFO, Jeremy Smeltser. Spectrum is a leading consumer brand company in the midst of a transformational change. They're selling their largest segment, HHI to ASSA ABLOY for about $4.3 billion or 14x EBITDA, flipping their balance sheet from 3.5x levered to over $1 billion in net cash post transaction. So there's a lot of things, a lot of exciting things going on here. And we'll start today's presentation with a 10 to 15-minute presentation from Jeremy. And then after that, I'll conduct a fireside chat. For clients interested in asking a question, please type it into the portal and we'll try to work that into the Q&A. And with that, it's my pleasure to hand it off to Jeremy to give us the overview of Spectrum. Jeremy?

Thanks, Bob, and thanks to Bob and the whole CJS team for having us set the new ideas for the New Year conference again this year. Excited to be here. It's already been a fun and busy day catching up with investors. So before I get into the overview, just a quick reminder that our remarks today include forward-looking statements, which as always are based on management's current expectations and assumptions and are by nature uncertain, and actual results may differ materially. So due to that risk, we always encourage you to review the risk factors and cautionary statements outlined in our press release from November and our most recent SEC filings as well as our most recent annual report on Form 10-K and quarterly reports on 10-Q. We assume no obligation to update any forward-looking statement. Also on the next slide, please note that we will discuss certain non-GAAP financial measures today from fiscal 2021 and reconciliations on a GAAP basis for these measures are included in the press release and 8-K filing issued again on November 12 of last year, which are both available on our website. So if we could, yes, thank you. Turning to Slide 4. Just a quick overview of our pro forma results for total Spectrum Brands, including HHI for fiscal '21 on a comparable basis to F'20 and consistent with our earnings framework. The total company is able to deliver in line with our earnings framework of mid-teen top line growth, with revenue accelerating over 16%. And delivered adjusted EBITDA growth in the high teens at about 19% and also delivered adjusted free cash flow of just over $270 million as compared to the earnings framework of $260 million to $280 million. So really pleased. We grew revenue by $650 million and adjusted EBITDA by $109 million. That said, we maintain our strategy of continuing to invest in insights, innovation and advertising and an elevated level across all 4 of the businesses despite the inflation headwinds we're experiencing. Team has done an exceptional job in my mind of managing profitability while continuing to invest in our future growth despite the challenges faced all of last year and certainly continuing into fiscal '22. We remain committed to maintaining our focus on long-term sustainable growth and investing in the business. Before we get further into the presentation, remind everybody, as Bob mentioned, the sale of HHI as of Q4 F '21 in our SEC filings, HHI is classified as discontinued operations and you'll get a look at that here on the next slide. Thank you, on Slide 5. So for just continuing operations, which is our Global Pet Care, our Home & Personal Care and our Home & Garden business, net sales increased over 14% and acquisition sales were a little over $120 million, and organic net sales were about 8% with double digit in our Home & Personal Care business. Sales performance was driven by strong consumer demand, particularly in the first half of fiscal '21 and favorable comparisons to COVID-related closures across many regions in fiscal '20. And adjusted EBITDA for continuing operations was up 21%, primarily driven by the volume growth, including acquisitions as well as productivity improvements and positive pricing, partially offset by margin pressure from commodity and freight inflation. So a few more details on the sale of HHI here on the next slide, again, announced in September, expected to close in calendar '22. Bob is exactly right, a multiple of 14x F '21 adjusted EBITDA for HHI, subject to regulatory approvals, customary closing conditions. On a net after tax and fee basis, we would expect to receive about $3.5 billion in proceeds and are targeting much lower leverage. We intend to pay down debt. We have a $400 million term loan and about $950 million in callable bonds that are logical places to pay down debt, but still have about $2 billion of capital to deploy and maintain a new net leverage target range in the 2 to 2.5x range, all while maintaining our quarterly dividend of $0.42 a share. As we flip to the next slide, just strategically, what's some of the rationale behind this? I mean, one, certainly, the valuation is much higher than where we're trading. I think has been a pleasant surprise to our shareholders, but really demonstrates, we believe, the value of our portfolio in general. I think -- we believe that a more conservative capital structure makes sense. I think investors are aligned with that as well. And then obviously looking to deploy capital as we go forward predominantly in our Home & Garden and Global Pet Care businesses, which are more consumer staples versus durables, more consumable-type products and we think with more attractive growth categories over time. We could flip to the next slide. I think I referenced it, Bob did as well, the change at Spectrum Brands. Our global productivity improvement program, which was started over 3 years ago has been the big driver of our success over the last couple of years. We remain focused on the continued successful execution of the program as we complete our transformation really. We're committed to the strategy of reinvesting the savings back into the business to drive long-term sustainable, organic growth. As of the end of fiscal '21, our teams had already captured over $175 million of gross savings and it really helped offset the adverse impact of tariffs and inflation. Now that amount includes the HHI business. The slide you see here is adjusted for continuing operations and the savings on continuing operations are about $150 million in total and approximately $135 million of that had been achieved through the end of fiscal '21. As we had anticipated, no inflationary pressure further accelerated in Q4 impacted our results, continues to impact our results in a more meaningful way. And although these inflationary trends are broad-based with an industry-wide impact, our quarterly results reflect the various actions we're taking to offset these cost pressures. We're leveraging the many advantages of our new global operating model and utilizing enhanced tools developed through our GPIP program to launch a coordinated response to these market issues. The GPIP program is driving further productivity improvements in our processes and helping us partner with our suppliers to offset some of the inflation. While we continue to make incremental investments in growth initiatives such as consumer insights, R&D and marketing across our businesses, supply chain improvement and resiliency is a key area of focus for us in fiscal '22 as we work to improve global product availability while simultaneously finding ways to mitigate the cost pressures coming through that we're experiencing. Now we'll talk about our capital strategy. Our balance sheet is strong. We ended the year -- this past year with net leverage of 3.5x and over $760 million in total liquidity. Last year, we were pleased to fund about $490 million of acquisitions without substantially increasing our leverage. And from a capital allocation perspective, we also repurchased 1.6 million shares of our common stock for about $125 million. As we move forward, you can see the target leverage range here on the chart. Our capital allocation priorities continue to focus on, first, allocating capital internally to our highest return opportunities, strengthening the brands, as I've mentioned. Second, returning cash to shareholders via dividends and opportunistic share repurchases. And finally, continuing with disciplined strategic M&A transactions that are synergistic and help drive long-term value creation. We believe this strategy will further enhance our position as a home essentials company focused on meeting consumer demand through our great brands and innovative product offerings. And now for our final slide here today, just a reminder of our fiscal '22 earnings framework, which is targeted at mid to high single-digit net sales growth in fiscal '22. Foreign exchange expected to have a slightly positive impact based on current rates. Adjusted EBITDA growth in the low single digits. This includes continued benefits from our GPIP program and approximately 8 months of results from the recent Rejuvenate transaction, which last year generated about $66 million in full year revenue. EBITDA is expected to grow, despite incremental inflation headwinds, in the $240 million range, which are mostly offset by annualization of current pricing actions and planned further price increases as well as additional productivity actions. From a phasing perspective, this is important. We do expect the first half and certainly the first quarter to be most negatively impacted by inflation pressures on a net basis as our pricing ramps up as the year progresses. So with that, I'll turn it back over to Bob to start with questions.

Great. Thank you, Jeremy, and thank you for that overview. Before we kind of get into the big picture, I wanted to start a little more with the near term, just because there's been a lot of questions from clients in this regard. And so ASSA ABLOY had -- upon the announced deal had said originally they thought the deal could close in calendar Q4, and you guys never did to your credit, obviously, knowing these things take time. But I guess if you could just give us a view where we stand in the sales process, how much overlap is there with HHI and ASSA ABLOY's North American operations? And I know you can't -- you don't want to talk about the specific deal, but what's the [indiscernible] timing for events like this? And how should we think about that?

Sure. Yes. And I will just say upfront, the buyer in these situations is always the one responsible for the filings and primary communications. So it wouldn't be appropriate for me to get into too much detail. But having said that, I would say that one, I think ourselves and ASSA are very like-minded on the transaction. I think they're a great strategic fit for the business there, quite frankly, in my view, are not a lot of overlaps in the businesses, revenue, products, channels, et cetera. And we remain very confident the deal closes as we would have expected from the very beginning. Transactions of this size in a public company environment, in my experience, 6 to 12 months has been things I've experienced over time. And I think that can be driven by a lot of different factors. How familiar are the regulatory bodies with the categories that are involved as you go into it, so there may be more education, certainly conversations with peers, competitors, consumers, et cetera. So look, I think the way we would describe it is everything is on track. There haven't been any surprises, and we're confident that it closes this year.

Okay. Super. And then just because there's been so much kind of discussion in the news about it, any tax changes or potential tax changes in '22 versus had this closed in '21 that would impact your expectations for proceeds?

Yes. Fortunately ...

[indiscernible]

Yes, sure, yes. Fortunately, the current developments that we're hearing from the administration are pretty consistent with what expectations we built into the model that landed us at the $3.5 billion net. So it shouldn't really have much of an impact on, if any, impact on net proceeds. And I'll just remind folks as well since I didn't say it in prepared remarks, that does include essentially using all of our NOLs here in the U.S., and those would essentially all be used to offset portions of the gain. As a reminder, for the broader audience, Spectrum bought the business for $1.4 billion in 2012. So this is a pretty significant gain.

Yes. Absolutely. Okay. Great. Okay. You gave us a very nice overview on GPIP in the prepared remarks. I was wondering if you could maybe summarize it as well. What are the biggest kind of benefits or takeaways from GPIP, not the -- I guess you said you're at $135 million of the $150 million goal in terms of savings, not just the dollars saved, but operational benefits? And how does it position Spectrum for continued growth? And what's after GPIP?

Yes. Great. Great question. I will back up a bit. I mean we talk about GPIP, and a lot of times, the first question and/or frankly, we lead with the savings. But the program is much more important than the savings. I mean, certainly, it has gotten us to where we are now with the EBITDA levels that we have despite all the inflation and tariffs. But really what GPIP is, if you step back from it, is going back 3 -- at least 3 years ago, when David came in as CEO, what is really about partnering with A.T. Kearney, now Kearney I should say, to be fair to their rebrand, which has been a fantastic partner to essentially help us on a journey to move from a decentralized acquisitive, what I'll call, portfolio management type company to a true operating company model, where many -- we would call them enabling functions, as you've probably seen in our slides, Bob, supply chain, IT, finance, HR, legal, et cetera, commercial operations. Those functions are all led from the center with the best of talent from inside the businesses as well as a lot of external new talent to support the businesses so that the business can spend their time focused solely on consumer product and customer. And that has really enabled us to have better visibility to everything in our business, even though our systems haven't been fully upgraded yet, as you know, we've got a big project going on to move to S/4HANA in one single instance over the coming 3 years. But it's really running the business in a consistent way of managing our relationships with our retail channels in a consistent way, consistent communications and best-in-class support for our business units so that they can thrive at doing what is most important for them, again, product, consumer, customer.

Got it. Okay. That's great. And then obviously, with the significant amount of cash coming in from the HHI sale when it closes, reinvestment of those proceeds will be key to the investment thesis into the stock success going forward. So I wanted to talk a little bit about your M&A. Can you tell us about the process and the criteria, what you look for in general, key attributes and businesses you're seeking and investment hurdles?

Sure. Yes. I mean process-wise, as it relates to identification of targets can come from a lot of places. Certainly, the leaders in our business units, J P, Troy, in particular, in Global Pet Care and Home & Garden, long careers in those spaces, no potential brands and targets out there, have relationships over time. And oftentimes, we can bring things into a potential M&A pipeline organically that way. Certainly, we have excellent relationships with investment banks in the Street and looking for ideas there. And David and Tyler Kolarik and his team have worked together for a long time in the CPG space. So I think anything, particularly in the U.S. and EMEA, it comes to market, I think we're going to at least see, understand and spend a little bit of time on, in particular, again, in the Global Pet Care and Home & Garden spaces. Process-wise, usually our corporate development folks and our business unit folks spend time together looking at targets and figuring out what they think the integration models look like, what they think the cost synergies are, what they think the growth rates are and partner together to do that before, frankly, they ever bring them to David, Randy and myself. And a big hurdle that we have as a company, and we are all very aligned on it, is a focus on -- to your question on criteria, we're looking for double-digit returns on invested capital on a risk-adjusted basis. And as everybody listening to this knows, multiples have been high, and they've been high for a while. And when you're spending or paying multiples in the low to mid-teens like have been happening in our spaces, you can't get to double-digit returns on invested capital without mid to high single-digit top line growth on an organic basis post acquisition and cost synergies in the 5%, 7%, 10% range sometimes to make it work. And so we've looked at -- I've been here, Bob, is coming on 2.5 years, we've looked at a lot more deals than we've consummated, but the 3 or 4 that we have consummated in my time and certainly the couple before that under David and Randy's continued leadership have all been exceeding -- at or exceeding our deal models, which is -- that's the goal, right? That's the whole risk-adjusted basis nature of how we do that because, frankly, we've experienced some risks, right? We've had the inflation we've had the tariffs and we're still exceeding those deal models. So I think we're doing a pretty good job, and we're very aligned culturally on what that process needs to look like. From an additional criteria perspective, things have to be at or accretive to the growth rates in those categories for Global Pet Care and Home & Garden in particular. So I think with Global Pet Care, depending on the study you read, 5%, 6%, 7% category growth is a longer-term expectation and certainly has been there the last 3 or 4 years and Home & Garden probably more in the 3% to 4% range. And then finally, we look to margins. And what I would say is we would expect things to be at or margin accretive, we would not be looking for margin-dilutive acquisitions unless we thought through synergies, we could get them at or above our current margins.

Okay. Great. And then just kind of staying with that thread, what makes Rejuvenate a good fit in this regard? And how is the integration of Rejuvenate progressing so far?

Sure. Yes. It's -- Rejuvenate is a great deal for us, and it kind of fits all those criteria. I think the physical footprint is able to be absorbed into our existing physical footprint. It's liquids in a bottle predominantly. Obviously, there's some hardware in there, but a lot of liquids in a bottle, which is what we already do very well in our Home & Garden business from a manufacturing and supply chain perspective. I think the combination of the entrepreneurship at Rejuvenate with our very strong PHD, R&D skill set in Home & Garden should help proliferate new product introductions as we move forward. And then I think two other things. One, I think it's a good beachhead for us to grow with an additional subcategory within Home & Garden, where we didn't really play in the past in that business with a business that is much smaller than its largest competitors from a Rejuvenate perspective, I mean, which means there's some room to grow market share there. And I think it's predominantly sold through 1 or 2 major retailers, and we have a much broader distribution relationship across our Home & Garden business, and I think we can get more shelf space in more places. So that it's cost synergies, it's revenue synergies, it's margin accretive, in a place that we could probably find additional acquisitions over time. It really checks every box for us.

Okay. That sounds super. And then last one on M&A. Just a question of, I guess, the bandwidth it takes to integrate Rejuvenate. Is there particularly more M&A in the pipeline right now? How is the pipeline? And would you wait until it's fully integrated? Or is there a potential acquisition? I know you can't predict timing in calendar '22 anyway.

Yes. I think you said it right. You can't predict timing, but that also means that you always need to be mindful of what's happening in the marketplace. And you don't want to miss a great opportunity. So we're still active in looking at things. I think it's always a possibility that we could have an acquisition in fiscal '22. I wouldn't rule that out. And I would say that the nature of the integration of Rejuvenate, the progress we've already made from an operating execution perspective, we're very confident we have the bandwidth for an additional one if it meets all the other criteria that we discussed.

Okay. Great. And then beyond M&A, obviously, the balance sheet will have a lot of cash on it. And you've been fairly aggressive or quite aggressive, I guess, with share repurchase with [ 1.3 billion ], I think, is the right math over the last 5 years. So maybe just discuss your thoughts on share repurchase right now and then how you weigh that versus buying additional brands? And if you believe you can continue to do both.

Yes. Yes, good question. I definitely think we continue to do both. Whether we had this influx of liquidity from HHI or not, I think the business generates good cash flow, and we would continue to do both. I think this gives us an opportunity to do both in a more meaningful way. And where the lever kind of tilts to which one's bigger, size, et cetera, I think, will depend on how the economy continues to do. So what's our outlook for our own business versus where the share price is trading and what acquisition prices are out there, multiples as well as what availability there is. I think the important thing for investors to hear us say is that we're not going to change our financial criteria or hurdles because we have more liquidity versus less. We'll continue to maintain that discipline. And if that means it takes us a couple of years, 3 years to deploy the majority of that capital, that's okay. We'll do it in the right way, and we'll continue to invest organically and invest in operating execution and in our brands. And I think the combination of all 3 of those things is what should create significant shareholder value over the coming years.

Okay. Great. And then kind of shifting to the operating business and focusing first on Pet and Home & Garden. Is there any portfolio reshuffling within those segments that make sense? Or in other words, are there small brands there that could be served better elsewhere? Are you pretty satisfied with your brand lineup there? Obviously, you're going to keep building and adding brands, but are there any that might be exit candidates as well? Or how do you feel about the brands within those segments right now?

Yes. I think we're pretty pleased with the brands that we have. I wouldn't say we're actively considering exits in those categories at this point in time. We're more focused on building, frankly. We do continue to maintain a focus of -- focusing on a smaller number of brands to hit a higher percentage of our revenue. And over time, that does lead to some brand rationalization, certainly sub SKU rationalization. I think we've cleaned up a lot over the last 3 years, which is also helping our growth rates move forward, and we can make sure that our investments in the brands are focused on just those what was top 15 prior to the HHI announcements now I'd probably describe more as top 12 because there was 3, if not 4 key brands in HHI that we focused on.

Great. And then with that thread, discuss the process of investing incrementally into your brands. I know you've done that with proceeds from GPIP, but how do you measure the incremental investment? And where do you stand now on investment in the current brands versus where you were and where you want to be?

Yes. That's a million-dollar question from my chair, from our Board's chair, David's chair. It's tough. Measuring the incremental investment is difficult because syndicated data for our categories is incomplete and very difficult to use, to measure those investments. We are investing more in that and investing more with some outside boutique firms to help us do that better. But it's not a perfect science. We also have just brought in additional talent. As you know, I think, Bob, Tim Goff, it's going as the President of the HHI sale -- going with the sale. He was our leader for commercial operations, working with Randy to stand that up. As he's transitioned on, we've brought in a gentleman who most recently was with Amazon, very savvy in this area, I think, to help us more with that. We do a lot of different things to measure. We do certainly monitor -- the data is out there. We monitor our POS versus what we're seeing in peers where we do get POS. And we get a fair bit of it with the large retail customers that we have. And then we also measure kind of campaign by campaign, market by market where we are very decisive when we launch to make sure we launch in certain markets in a geography and not others and measure POS in a short period of time and what the response is there. So we do a lot of different things, and we'll pivot quickly. That's the beauty of our CommOps team, they're monitoring those investments across all of our business units and keeping us to that high standard. So while it's not perfect to measure it, and it will get better over time, we're really pleased with what we've done so far. Where do we stand? On a full business basis, we're still under 2% of net sales from just an advertising perspective as one benchmark. I think over time, we would expect to continue to move that forward probably to the 2.5% range as long as we continue to see the returns on investment that we are looking for. And while we're pleased with the quick results because I mean, it's just been in the last 2 years, from F '19 to F '20, as a total company, including HHI, we essentially doubled advertising from about $35 million to, I believe, about $68 million in fiscal '21. Building that brand equity consumers' minds, that's something that you actually -- we probably think that it's 2 to 3 years before we really get the biggest level of return for it. So I think there's more to come on that.

Okay. Great. And then I wanted to jump to new product development. I guess one question just as it relates to the current, difficult market environment. Does the focus -- the necessary focus on mitigating the supply chain and raw material impact new product development? Or are you able to navigate through each? And then the question on NPD is how does the calendar or fiscal '22 new products stack up versus your expectations and versus prior year's new product launches?

Yes. Good question. So the supply chain issues don't really impact our new product development pipeline dramatically. We're able to continue with those separate teams, certainly linked because anything that we're going towards launch. Obviously, supply chain has to be there, and we have to be able to procure. But haven't seen any slowdown in that, which is great. I think F '22 we would expect to be the biggest year, certainly since I have joined for new product launches across the business. And F '23 I think, will be even bigger than that based on the pipeline as we see it today. And many of particularly in Home & Garden, the new product pipeline that they've been working on for 2 years now, will be in its third year in F '23, which is typically when you can finally get approvals to be able to launch those from the EPA and other bodies that kind of oversee any formulas and claims that occur in that space. So we're really excited about that. The last couple of years, we've seen some good ones. But I think from a volume of new product introductions, that's just increasing in F '22 and even more in F '23.

That sounds super. Okay. We have a couple of minutes left here. And obviously, with all the change going on and everything we've talked about. Maybe we can wrap up with this question. And that is, what does the company look like 3 to 5 years from now?

Yes. That's a good question. And it's a theme, frankly, of investor questions as we're going throughout the day here. Look, I think in an ideal world, we would find a different home, frankly, a strategic home for HPC, where that business could participate in industry consolidation, which I think is important. It's a very different type of market than the other 2 businesses in the continuing operations and that we would be more focused, again, I said earlier, consumer staples, consumables versus durable good-type company. I would expect that we've continued to see organic growth based on the investments that we've made in the operating model as well as the brands. And that our M&A activity in those 2 spaces probably accelerates a bit from what we've done in the last couple of years. And so we're back on a trend growing back towards $4 billion in net sales would be great. You never have just a net sales target with no other targets kind of throttling that because you make bad decisions, but that would be an ideal world where we're doing that. We're executing well on those integrations. And we've been able to buy some shares back over time, which just helps leverage more value for our shareholders.

Okay. Super. I think we're running into the end of our spot here. I'll give you the floor for any closing remarks or any key takeaways you want people to get from this. And I'll just say thank you again so much for your time for this presentation and really all day because I know we're keeping you busy. So thank you.

Yes, we are. It's fun, Bob. And again, we appreciate being here. And what's most fun about it is all the new names that have been drawn, showing interest in Spectrum particularly since the announcement in September on HHI and really getting to educate a lot of new potential investors in Spectrum Brands is a lot of fun for me. I certainly enjoy it and happy to do it, and I'm glad you packed my schedule today because that means I'm talking to more folks. So thanks to everybody for listening. I appreciate your interest. Many of you know, but many of you may not know, we are running without an Investor Relations leader right now. So reach out to me directly if you have any questions or want to connect. And we will figure out a way to get somebody connected with you, myself or Treasurer or Head of FP&A or kind of covering it all together. So thank you.

Super. All right. Thanks, Jeremy. Thank you, everybody. And we hope you have a good productive rest of your day with us at CJS. Thanks.