© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Natalia and I will be your conference operator today. At this time I would like to welcome everyone to the Spectrum Brands, Fiscal 2019 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' prepared remarks, there will be a question-and-answer period. [Operator Instructions]. As a reminder ladies and gentlemen, this conference is being recorded today, Thursday, February 07. Thank you.
I would now like to introduce Mr. David Prichard, Vice President of Investor Relations for Spectrum Brands. Mr. Prichard, you may begin your conference.
Thank you, operator, and welcome to Spectrum Brands Holdings Fiscal 2019 First Quarter Earnings Conference Call and Webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today.
Now to help you follow our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at Spectrumbrands.com. This document will remain there following our call.
So if you start by turning to slide two of this presentation, you'll see that our call will be led today by David Maura, our Chairman and Chief Executive Officer; and Doug Martin, our Chief Financial Officer. David and Doug will deliver opening remarks and then they will conduct the Q&A session.
If we turn to slides three and also slide four, we want to note that our comments today do include forward-looking statements, including our outlook for fiscal 2019 and beyond. These statements are based upon management's current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially.
Now due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 7, 2019, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statement.
Also, please note that 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.
With that, I will now turn the call over to our Chairman and CEO, David Maura.
Thank you, Dave, and thanks everybody for joining us today for this call. Before jumping to our Q1 results, which I guess I need to tell you to turn to slide six, I want to highlight some of our strategic achievements. We are exiting a period of significant transition and we are now entering a period of stability with meaningful operational opportunities.
In January, we made major progress in completing our transformation into a meaningfully less leveraged and much more focused consumer products company with materially increased financial strength and flexibility to drive our long term growth ambitions.
We closed on the divestiture of both our Global Battery and our Lighting Businesses, and we also sold our Global Auto Care business. These two asset sales brought us to combined gross cash proceeds of approximately $2.9 billion, along with $5.3 million shares that Energizer issued to us, making us one of their largest shareholders. We also were able to utilize capital and net operating losses to minimize cash taxes on these transactions.
Using the battery in auto care proceeds we moved quickly in January to repay in full all of our cash revolver which had about $114 million on it at that time. We pre-paid in full all of our U.S. term loans totaling approximately $1.23 billion and we just recently last week redeemed all of our $890 million of our 7.75% notes. These were the former HRG bonds.
These actions reduced our death by over $2.2 billion and represent major progress to achieve our goal to significantly de-lever and strengthen our balance sheet, materially reduce our cash interest payments for the balance of this year and beyond and further improve the tenor of our obligations.
As a result of these steps early this year, we are on track to achieve our leverage target of approximately 3.5 times at the end of this fiscal year. As we have a delevered balance sheet, we may look to repurchase our shares under the repurchase agreement in the open market or otherwise from time-to-time.
If I could have everyone turn to slide seven. Now turning specifically to a quarter, Q1 is traditionally the smallest quarter of our year and we delivered results that were generally in line with our expectations. We also continue to expect the second half of ‘19 to be larger than the first half for both sales and EBITDA, driven by the seasonality of our Home & Garden and typically the stronger back half we experience in HHI.
We are very pleased by the strong start this fiscal year in our Pet Care Unit. Although Q1 growth was just 2% organic growth, it was led by a double digit increase in the United States markets. As a turnaround this business is now under way. We are continuing to focus our efforts to improve the Pet performance in Europe, primarily the Dog and Cat food assets.
HHI faced a difficult comp this quarter. It had a 13% net sales growth in the period last year and that was driven largely by hurricane related, hurricane recovery revenue and retail was also driven by two significant non-repeating promotional loadings last year to significant customers and quite frankly the impact this year from a softer U.S. housing market and we began to see the effects of that late this November.
We now must work closely with our retail customers to drive this business forward, despite the recent headwinds in the new housing markets, which again we began to see in November. We still expect a strong performance from HHI this year, driven by strong innovation such as the recent unveiling of a new line of Wi-Fi enabled Halo smartlocks at the Consumer Electronics Show just this past January.
As expected, our Home, Appliance and Personal Care business started slowly. We are reintegrating this business and we stood the business back up this quarter. We are focused on improving the business fundamentals and we are lapping difficult first half comps.
Additionally, we are materially increasing investment spend to drive innovation throughout the year and into 2020. We are stabilizing Home and Personal Care and we are expecting improved performance as we move through the year.
As a terrific example of the new thinking about the business, this morning we are excited to announce a major new global five year partnership between our Remington Personal Care brands and the Manchester United football team. This is an alliance that we believe will showcase the depth and the strength of our Remington line worldwide and begin the process of further strengthening the amazing brand equity inherent to this business unit.
Home & Garden had slightly lower sales and that was due to the absence of a strong prior year revenue from the aftermath of hurricane Maria that we have in Porter Rico. Q1 is Home & Garden’s seasonally smallest quarter representing only about 10% of its full year sales. We expect sales and EBITDA growth for Home & Garden this year driven by new distribution wins and improved product mix.
Now if we look at the full year fiscal ‘19 outlook and you can turn to slide eight for that. We are today reiterating our fiscal ‘19 adjusted EBITDA guidance of $560 million to $580 million versus the 2018 pro forma adjusted EBITDA of $581 million for the same four continuing businesses.
This guidance includes the impact of a significant increase in targeted and impactful investments in advertising, material new product development initiatives and marketing to improve both the vitality and the strength of our product offering to put Spectrum Brands back on a meaningful growth trajectory beginning in 2020.
2019 is a year of focus for Spectrum Brands. It's a year we will materially step up investment spending behind our major brands and the continued alignment of our organizational structure and operating processes to streamline our activities and reduce waste. We are establishing clear lines of accountability and this is providing for quicker decision making behind a much stronger balance sheet with ample liquidity.
In closing, our team is singularly focused on creating shareholder value by strengthening and innovating behind our strong portfolio of leading consumer brands, delivering operational excellence in our manufacturing facilities and supply chain and providing all this with exceptional customer service.
In short, we are becoming the faster, smarter, stronger Spectrum Brands of the future and we are being driven now by vision, clarity and focus.
With that, I will turn it over to Doug.
Thanks David and good morning everyone. Turning to slide 10 and we review our Q1 results from continuing operations and we'll begin with net sales. First quarter reported net sales of $874.6 million decreased 4.9% versus last year. Excluding unfavorable foreign currency of $13.6 million, organic net sales fell 3.4%.
Higher Pet sales were more than offset by lower Home & Personal Care and Hardware & Home Improvement revenues. Reported gross margin of 34.9% increased 30 basis points from 34.6% last year, primarily due to product mix. Reported SG&A expense, $259.6 million or 29.7% of sales compared to $233.5 million or 25.4% of sales last year, primarily due to the one time recapture of $29 million of non-cash depreciation and amortization charges that were not reported last year due to Home & Personal Care discontinued operations status, as well as lower acquisition and integration and restructuring and related costs this year.
I’m going to just take a minute and talk about this depreciation and amortization adjustment this year, because it not only affects this quarter but also the remaining quarters in the year. This adjustment is a catch-up – non-cash catch-up adjustment required as we put the HPC business bank into continuing operations.
For depreciation and amortization that would have been recorded in Q2, Q3 and Q4 of 2018, all of that catch-up was record in Q1of 2019. So going forward it will also impact our year-over-year comparisons for 2019 Q2, Q3 and Q4 because last year we had zero depreciation and amortization; this year we’ll have roughly $10 million in each quarter.
Moving on then to reported operating margin also impacted by this depreciation and amortization adjustment we had 2.8% margin in the quarter versus 5.6% in the prior year. On a reported basis Q1 diluted loss per share from continuing operations of $0.56 decreased compared to diluted income per share of $1.24 last year, primarily due to the recapture of $29 million of non-cash depreciation and amortization, lower interest expense, a tax benefit last year attributable to U.S. Tax Reform and higher shares outstanding this year as a result of the HRG merger.
Spectrum only adjusted diluted loss per share from continuing operations of $0.20 decreased versus adjusted diluted EPS of $0.68 last year, primarily due to the Home & Personal Care depreciation and amortization adjustment, which contributed about $0.41 to the decline, as well as lower volume and income tax benefit in last year's first quarter due to U.S. Tax Reform.
Turning to slide 11, reported interest expense from continuing operations in the first quarter were $57 million, decreased $18.4 million from $75.4 million last year, due to the pay down of HRG related debt.
Spectrum only cash interest payments of $56 million were $1.5 million lower than last year, driven by the timing of payments on our cash flow revolver. Spectrum only cash taxes of $10 million were flat compared to last year, and in addition we incurred about $12 million of taxes for activities related to our battery business carve-out.
Spectrum only depreciation, amortization and share based compensation from continuing operations of $72 million increased from $43 million last year, primarily due to the recapture of depreciation and amortization for Home & Personal Care as a result of the continuing operations classification in Q1 of this year.
Spectrum cash payments for acquisition and integration and restructuring and related charges for the first quarter of 2019, including discontinued operations were $6.1 million and $9.9 million respectively versus $5.3 million and $24.8 million respectively last year.
The reduced costs were drive by the absence of last year's operating inefficiencies in our HHI Kansas DC facility. Acquisition cash cost last year related to our Battery & Appliance divestiture processes and HRG merger costs. And now on to our business units, from continuing operations beginning in slide 12 in Hardware & Home Improvement.
HHI reported Q1 net sales of $305.1 million decreased 6.4%, driven predominately by the absence of strong prior year U.S. hurricane revenues, in the retail channel across Residential Security, Plumbing and Builders Hardware to significant non-repeating promotional load-ins from customer wins last year and residential security and recent housing market softness.
Excluding unfavorable FX of $1.6 million, organic net sales fell 5.9%. Reported adjusted EBITDA of $55.6 million fell 7.3% with a reported margin decrease of 20 basis points due to lower volumes and unfavorable operating expense leverage. New product introductions continue at a steady pace in Q1, reflecting HHIs strongly vitality rate and we still expect to have – HHI to have a solid performance this year.
Now to Home & Personal Care, which is slide 13. HPC reported Q1 net sales of $317.2 million, fell 7.3%, while organic revenues of $327.4 million decreased 4.3%, excluding unfavorable FX of $10.2 million.
For Personal Care, strong growth in Latin America was more than offset by decreases in the U.S., primarily from the impact of prior your losses, retailer distribution adjustments in mass and drug, e-commerce softness and in Europe primarily due to Brexit-related soft consumer demand in the U. K.
For small appliances, growth in Latin America, Canada and Asia Pacific was more than offset by lower U.S. results, primarily from e-commerce and in Europe also driven by Brexit-related soft consumer demand in the UK. HPC reported adjusted EBITDA of $35 million, fell 16.1% with a 120 basis points reported margin decrease.
The lower EBITDA was due to a reduced volumes and unfavorable product mix. Home & Personal Care expects an improved second half with new product introductions in the U.S. and Europe and expanding distribution.
As David mentioned, Remington today also announced a five year partnership with Manchester United that will provide significant brand exposure and given the clubs worldwide reach and following will be terrific for our brand. This is a good example of the step up in spending we are planning across the company this year and into the future.
Moving to Global Pet, which is side 14. Q1 reported net sales of $204.7 million, grew 1.1%, primarily due to double digit increase in U.S. companion animal revenues, predominantly dog and cat chews and treats, partially offset by lower U.S. aquatics and European companion animal sales.
Excluding an unfavorable FX of $1.8 million, organic sales increased a solid 2%. Reported adjusted EBITDA fell 14.7% to $29 million with a 260 basis point margin decline to 14.2%, driven by unfavorable product mix and higher distribution costs.
In fiscal 2019 Pet expects solid performance in its largest region, the U.S., as it continues turnaround work to improve profitability of its European operations, primarily the branded dog and cat food business.
Turning to Home & Garden, which is slide 15. Home & Garden Q1 reported net sales of $47.6 million decreased 3.4% as a result of the absence of strong prior-year household control and repellent revenues in Puerto Rico in the aftermath of Hurricane Maria. As a reminder, Home & Garden’s first quarter is its seasonally smallest quarter, typically comprising about 10% of full-year revenue.
Reported adjusted EBITDA of $3.1 million decreased 42.6% and reported margin of 6.5% fell 450 basis points. The decline was a result of the timing of seasonal production, unfavorable product mix and higher input costs. Home & Garden continues to expect sales and EBITDA growth in fiscal 2019 driven by new distribution wins, improved mix and strong continuous improvement savings.
Moving to the balance sheet, and slide 16, we entered the first quarter of fiscal 2019 in a solid liquidity position, including $664 million available on our $800 million Cash Flow Revolver, and a cash balance of $252 million with debt outstanding of $4.8 billion.
Then our liquidity and capital structure position experienced a step-change improvement in January as the company prepaid in full all of its U.S. term loans totaling $1.23 billion, $114 million on its Cash Flow Revolver, and redeemed all $890 million of our 7.75% bonds using proceeds from our battery and auto care divestitures.
As a result of this debt reduction of more than $2.2 billion, pro forma as of December 30, 2018 and using trailing four quarter EBITDA from continuing operations, our gross and net leverage were approximately 4.6 times and 3.1 times respectively, down from 5.8 times and 5.2 times at the end of fiscal 2018. This reflects a 46% reduction in debt from our fiscal year end. Q1 capital expenditures from continuing operations were $13.5 million in the quarter versus $20.3 million last year.
Now turning to slide 17 and our 2019 guidance. We expect reported net sales growth from continuing operations in 2019, driven by innovation, increased marketing investments, pricing actions, which include tariff-related increases now expected to go into effect on March 1 and market share gains.
We now expect FX to have a negative impact on sales of approximately 150 basis points based on current rates. We reaffirm our guidance for adjusted EBITDA from continuing operations to be between $560 million and $580 million as we stabilize operations and increase revenue-generating investments in an inflationary environment, including the anticipated impact of tariffs and input cost increases, partially offset by pricing actions. We have $1.3 billion of usable federal NOLs remaining post the asset sales and have used all of our capital losses. For adjusted earnings we now use a tax rate of 25%, which including state taxes.
Thank you, and now back to Dave for questions.
Thanks David and Doug. Operator, with that you may now being the Q&A session please.
[Operator Instructions]. And your first question comes from the line of Olivia Tong.
Good morning. I wanted to start with free cash flow and your full year expectations there, because routines [ph] has always been for a back end loaded year, given the cadence of the season and the seasonality in your businesses. But this year's Q1 loss is significantly larger than years past. So can you talk through a couple of puts and takes there? Are there any exogenous events? Obviously the loss from this cost is a big chunk of that. So how much of Q1 in your view is tied to businesses that are now no longer part of your portfolio versus of that are in your go forward businesses. Thanks.
Hey Olivia, good morning. Hope you are well. Look I think you know this year we've got a lot of moving pieces, but I think we are really starting to settle things down. You know clearly we just paid off $2.2 billion of debt, a little bit more than that. I mean you can do the math on that on a on a rolling 12 month basis. That frees up about $129 million of cash interest. So obviously that's increasing the free cash flow going forward by a material amount.
We’ve kind of stayed away from giving free cash this year because we've got so many moving parts and we are still not done with all of our capital allocation decision making, which will affect that. But why don’t I let Doug take the nitty-gritty of it and see if that that helps you with the question some more.
You are absolutely Olivia; there were a lot of pieces in the first quarter that are non-cash related. So the additional write-down of the GAC business to reflect the net proceeds we received on that is a big one. The doubling up of the depreciation and amortization, the catch up of the depreciation and amortization relating to the Home & Personal Care reclassifications in there.
The fact that the two businesses that we sold in January were in our cash results for the first three or four months, depending upon the business and as you know, we used cash this part of the year across all of our businesses as we are investing in inventory for our season. So there are a lot of moving pieces that will make this year’s cash flow numbers really not representative of the continuing operations of the business and so some of the cash that we are seeing in proceeds, we would have ordinarily flowed through the free cash flow this year, but they’ve become working capital adjustments or working capital targets in those sales, so it’s just a confusing story.
And as David mentioned, you know when we make the capital structure choices and when the interest payments on our existing debt would have been paid, also impact free cash flow for the year. So the short answer is we're not going to update guidance on free cash flow this year, but we'll give you as many pieces as we can. We still have significant NOLs; we still expect to be a relatively modest tax payer, cash tax payer going forward.
We expect to invest in CapEx at about the 2% rate across the business going forward. We expect significant improvement in restructuring and our expenses this year. And then, you know again David gave you the kind of the parameters to do the math on what we’ve decided so far in the capital structure. I know it's a long story, but that's also the reason we are not giving specific guidance.
Got it. Maybe if I could turn just to sales, you know the sort of soft guide down from “meaningful growth” to just growth. I guess for you to break that down, is that simply a reflection of the lower Q1 base or did you also ratchet down your expectations for the remainder of the year and can you talk about sort of part and parcel with that, the order of magnitude of some of the investments that you said you are planning to make around advertising and R&D and the like.
Look, I think the quarter actually came in as we said in the opening remarks, you know largely in line with what we planned to be very blunt. The only thing we saw in the quarter was a little bit of weakness in HHI, so we expect a little bit more sales there.
Look I think when we spoke to you last time, we had anticipated pricing a bunch of tariffs at the end of the calendar year that obviously got postponed and so that was in the revenue guidance there.
Organically you know I expect a very good year out of particularly Pet and Home & Garden and we still think we have a pretty solid year in HHI. Obviously it’s going to take us a couple of quarters to get appliances to backup and reinvest and get that healthy, but you know as we go out to retailers and we are talking to them about the new investments we are making, both innovation and also consumer insights and actually communicating the message, we’ve just been very weak there, particularly in the U.S. and the marketing side.
As we rebuild that, you know we are capturing a lot in new orders. In fact I think even in the last call I talked about some of the new wins we are getting. But if I get anew win today, and new listing today, I don't ship it for six months in that business. So that's really where we see kind of you know the June and September quarter being much stronger in that particular unit.
But you know look, I would say if there's anything that changed from the last time we spoke till now, it's that yeah – we have a weaker housing market and we need to be on guard there, we need to have contingency planning, we've got to work much more closely with our retailers to make sure we bring that year in as we originally planned, because we definitely feel the effects of the fed interest rate hikes and we definitely see the effects particularly in new home sales that have declined as a result of that.
Does that help you?
Yeah, I mean I guess, could you talk about the benefit…
I don’t want you to – yeah, I don’t want you to think that there is any less confidence in the full year guide, other than there is a delay on the pricing for tariffs and we see some softness in house.
Yeah, the only additional thing on a reported basis Olivia is that we’ve moved FX guidance from modest impact to 150 bips based on the first quarter on where rates are today.
Yeah, I missed that. Thank you, Doug.
Yeah, I guess just following up on the housing and the impact on HHI, I mean what kind of benefit do you think you guys had in the past, because of the favorable housing market but now you expect it on line.
Yeah, look I think in general we enjoy you know dominant position in what I call kind of replacement cycle model. So you know we have the largest installed base in the United States with our quick set product and you know we've got smart key technology, which is a material advantage versus our competition. We are seeing real increase in the adoption of mechanical locks and real excitement around some of our new Bluetooth and Wi-Fi locks. So I think you know we'll continue to have gains on the innovation side and we hope to continue to drive that business.
I would say that, you know – but we're not immune right. So 75% of that business called is replacement cycle businesses. It holds up well. But we are – the other piece of that is new home sales and so you know our kind of view and some of the reports we study and [inaudible] we figured that every 25 bips that the fed has raised rates, it's kind of destroying or making unaffordable I guess would be the better way to phrase it, probably 10% to 15% of buyers.
And so we actually agree with the recent stance of the fed to pause, because housing is such a critical part of the economy and you know in fact, you know I think with the market turmoil, plus the fed increases in kind of late November and December, I think in general if you talk to our competitors, talk to our retailers there was some real softness.
You know recently we've seen an uptick and again, I’m not using this call to say it is not clear at all. I think housing headwinds are – we need to plan for them for the balance of fiscal ’19, but we are still expecting pretty solid performance at HHI.
Okay, operator could we go to the next question please.
Your next question is from the line of Bob Labick.
Good morning.
Hi Bob.
Hi Bob.
Hi, so I wanted to shift operationally. Obviously over the last 18 months or so there has been quite a problems, recalls, distribution center consolidation, etcetera. Where are you now in terms of operating performance? Kind of what's left in the urgent pile and how long should that take and then when do you get to start shifting to ongoing improvements versus fixing problems.
You know we are there. So we just took the board of directors through Edgerton in Kansas and you know our fill rates are 99 and I’ll tell you. You know if I could have taken you through the facility with me in April when I first took on this this new seat, it was rough sliding and to take the board through there and show them you know the clean, efficient distribution center that is now what we call CFC, I’m really product of that, and it’s funny because all of last year was about how to get the backlog down and how to fill demand.
And so now we're flipping that around and we are trying to tell our customers, ‘hey listen, we are very, very efficient. We are exceedingly good with innovation and we are exceedingly good now in terms of fulfillment and in time and on time delivery.’
And so you know last year we were getting funds, you know December we had no funds. So you know we are – I think we are there and we need to flip it around using this strategic advantage now and get off our back foot and you know the difficult part in that particular examples is we do have headwinds in housing. So now you’ve got to use that new fulfillment capability and the excellent customer service and go get more wins and drive the volume.
But I think, look you know obviously you know we no longer own Global Auto Care. You know that we did a lot of improvement on it and I think our friends at Energizer are going to finish that work for us over the next couple years and get that thing humming and where it needs to be. But no, I think the triage that was kind of April through December is behind us and we are now going on the offensive again. I appreciate the question, it's – Thank you.
Yeah, no great. It’s good to hear, so thank you. And then kind of in terms of new products, maybe by segment or maybe overall, where do you stand you know relative to other years? Are you at the right mix of new launches or do you expect innovation to accelerate and what does it take to do that?
No, you know I think we are okay, I think you know businesses are different. You know I would say the NPD pipeline in HHI is always been strong and remains robust. I think you know Home & Garden has done a pretty good job.
Pet is now catching up, but we still got work to do in Pat. I think we have a – actually believe it or not, I think we have a very healthy NPD team in appliances and they’ve done a much better job honestly on the European continent of actually you know getting true consumer insight, getting the right product to the right customer and then communicating to the end consumer the benefits of that product, and that's why you see the big investment today behind Manchester United and kind of making Remington Global and really putting that brand back on the map.
But you know I think we could do a better job with consumer insights and then telling that story here in North America and actually yesterday we just made some management changes in that division and we are really beefing up the marketing side of that the United States. Honestly, our retail customers are starting to hear about what we're doing and being good stewards of that appliance business again and it is translating into orders. But to your point, I think the vitality there could be better and we need to get that out and hopefully we can talk more about that as we get into the back half.
Doug, you want to add anything?
Well said.
Okay, great, and one just quick clarification. Your 3.5 times leverage target, is that a gross or a net debt…
It’s a target because you know we have some choices to make here, so we’ll…
I mean listen, let's be very blunt right. We've done a lot in a very short period of time, right. January 2 we got a $2 billion wire and we immediately moved to pay all the revolver down, we paid off all our term loan. At the end of January we got some more cash in and we took out you know all of our HRG debt, the $890 million of debt there and you know if we just run the business without doing any capital allocation decisions, we’ll probably end the year with $1 billion of cash and nothing on the revolver.
So I think being $1.8 billion liquid is probably too liquid even though I like liquidity, and so we've got some more decisions to make here as we you know enter the spring and get into the summer and then that's why we are kind of, you know we are just not willing to commit on the free cash flow and you know the question you just asked. But let us continue to accept, you know look at market conditions, look at our capital structure and continue to hopefully make good decisions here.
Okay, operator next question please.
Your next question is from the line of Nik Modi.
Yes, good morning.
Hey, good morning. How’s everyone doing?
We’re doing better, we’re making progress.
Excellent! Just a couple of questions, quick ones from me. So on the HPC side you talked about kind of softness in the eCommerce channel and distribution losses. Just maybe some more clarity on that. Is that just a function of the fact that you are going to sell the business and so maybe there was some slippage there, that's the first question?
And I guess the broader question, Dave when you think about you know the amount of change that’s taken place at Spectrum Brands and the fact that you are kind of heading into peak season, you know how do we think about kind of you know disruption, turn over, you know talent retention, you know maybe you can just give us some thoughts on that.
Yeah, look sure – I have ADD, so I’m going to probably make you a place, a re-ask to that question, but look, I’ll take the talent piece and then remind me of your first piece.
I actually – I feel super good about where we are. I think look, last year you said was mind numbing from not only – look, if you went back a year, I thought basically just getting the HRG deal done would be our greatest challenge and then all of a sudden in April operationally we came off the tracks and so I found myself you know not just doing – trying to transform the company, but I was in the middle of a turn around, so you are 100% right.
You know the amount of, whether it was HRG of appliances being on and off the market, batteries actually getting closed, but it took over a year to get there and then pivoting and selling auto. I mean just a tremendous amount of you know strategic activity and then operationally we had our hands more than full. So I think that's why you know again the theme of 2019 is really kind of reinvest in the business, get this place stable and you know invest materially so we can get growth reignited for 2020.
The team is in really good shape you know and as people see the balance sheet getting stronger as they realize that we are becoming a free cash flow, you know a very strong free cash flow generative company again, as they see the stability on the appliance side, you know I think people, the energy level is up, people want to win again and we are starting to get orders.
To go back to the first part of your question which I actually remember, it’s amazing, is you know a lot of that appliance disruption, it wasn't just me putting the business on the market for sale which clearly creates tremendous uncertainty and yes, we did experience pretty high turnover. But additionally and I'm partly to blame, you know we tried to take pricing in an inflationary environment and we lost a lot of listings and we are still suffering from that and you still see that in the numbers today.
What we've done is, the team’s done a great job of going back out to retail, showing the recommitment to the business, showing that in fact we are bringing new products we’re bringing excitement and we are going to advertise behind it and we’re winning those listings. And so hopefully you know I'll be able to talk to you in June and September about a much stronger appliance business.
Okay, thanks so much for the color.
Thank Nik. Next question operator.
And your next question is from the line of Faiza Alwy.
Hello!
Hi Faiza.
Yes hi, good morning. So I guess I wanted to first just delve a little bit deeper on the housing softness that you alluded to. Have you seen any slowdown in the remodeling market and what's your outlook for that market, I guess this is the first question?
You know remodeling always holds up better; there's pent up demand, there is still short supply of existing homes that you know, so that market we think remains healthy and in fact we see growth to be blunt you know.
So it's really the new housing side where it’s gotten me mostly concerned and look again, you know since we published these numbers and since we are talking to you about the December quarter we've seen an uptick since then, but I – you know let's just see. You know is it really because just the market disruption and the interest rate hike that caused kind of a blip that I think the whole industry saw kind of a pullback in November, December and you know are we going to stabilize from here and grow, you know I don’t know, I don't have a crystal ball.
What I do know is, you know I need to prepare for a continued softness in a contingency planning and make sure we work with our retailers to get more velocity at that point of sale and that's what we are doing.
Okay. So what is your – so even though the housing market has been soft and your tone seems more cautious there in the market, like you've kept your EBITDA guidance as is. So is there an offset or are you assuming that the market sort of you know comes back or was it you know too conservative previously? And then within that I guess if you could just cover a little bit more around what you’re embedding for like pricing and the raw material environment for the rest of the year, that would be helpful.
You know look, we’ve taken pricing and that pricing you know is phased in and it mostly occurred you know unfortunately during the softness. And so you know that pricing isn’t in this quarter. You know it got phased in a little bit in November and so some of it you know we actually got a little bit of benefit in December, but no and I think too you know. I got to make sure you were you know – three quarters of our business is pretty stable. Its replacement cycle, its remodel, it's multifamily.
You know it's pretty stable, unless you had -- it looks like – we have a big housing recession; that's a different story you know. I can't have this done with you on this call, but you know the bulk of our business is pretty steady Alwy and what we saw the pull back in is the new housing and you know I think you see that gross margin improved a little bit you know this quarter and we took some pricing and so that's why we are able to maintain the full year outlook.
You know again I think where I sit today you know a week into Feb I feel good about HHI putting in a solid performance and if you look seasonally right, Q1 is a tiny quarter for HHI. HHI’s big quarters are Q3, Q4.
Okay, if I may just ask one more question and that is you've alluded to a number of you know capital allocation decisions on this call. Could you talk a little bit more about that and I'm wondering if you know what your through process is around M&A and maybe Dave if you could talk a little bit more about you know how your spending your time and how committed you are in terms of remaining you know with – as CEO of Spectrum.
You know, I was here last week. It was -30 degrees and my coffee froze before it hit the floor out of the car, but other than that things are good. Look, I’ve spent 10 years building the company as you know and I think we did a pretty good job allocating capital externally and obviously lower interest rates you know helped with that and we brought good higher margin, higher varied entry, higher free cash flow businesses.
I think you know clearly I stopped buying businesses you know three or four years ago, because I thought multiples got too high and I think we could have done a much better job of allocating capital internally, which is what you know I've embarked on since April.
Obviously look, life isn't always linear and you know my journey through ‘18 was unexpected, but I love this company. I'm committed to the company, I'm very excited about the company's future. I think we have tremendous operational opportunities to go after here that we can talk more about after we achieve them, not before and you know I'm all in.
Great, thank you so much.
Okay, next question operator.
Your next question is from the line of Jim Chartier.
Hi Jim.
Good morning Jim.
Good morning. Thanks for taking my question. First on HHI, I just wanted to ask about the thought process in terms of walking away from the promotions this quarter. Did those promotions really not execute at retail? Did they get to another vendor and then any additional promotions you might be thinking about walking away from in the future for HHI.
I’m going to let Doug take it, because I’ve talked too much on this call.
Well, the promotions we had last year were the big – one of them was a big box store, non-traditional data that we called them in category one here. It’s in the…
Club channels.
Club channels, thank you, and that was a non-repeating one for us. We do – in this time period we continue to pursue those opportunities and our brands there as well in that channel, in and out kind of way.
And the other one was related to the load in for our Amazon Secured Connect program a year ago and that is more of a steady business for us now rather than the initial heavy load.
Right. And then it’s great to see the improvement in the U.S. Pet business. I think on the last call you talked about the defirmator [ph] line where you were investing behind with more advertising and the re-launch of the raw hide business. So I just wanted to get an update on how firmly we’re just doing with that relaunch and the additional advertising and raw hide as well. Thanks.
Listen, the packaging there is phenomenal and a lot of it was just getting rid of counterfeits you know. It's such a great product. It's like it's the one product that actually works and it does what it says it does. You know we had a ton in Norfolk and I got to take my hat off to Randy Lewis and the team down in St. Louis.
You know we've got so many inscriptions and we register with Amazon's registry system and so we are really able to stop the counterfeiting of that and it the new packaging. If you haven't seen it, go look at retail. It's a phenomenal packaging, its great marketing, it's doing well. GloFish is doing great, you know dream bone, smartphones from that matrix is way above plan and so look, you know it took us a year longer than I thought because of the recall we had you know in the past, but the U.S. Pet is back and it's back to stay and we’re going, so yeah.
I also think look – I also think, I'd be remiss to say, I think retail specialty retail is realizing they need brands, they need innovation and we need to do a great job partnering with them. I've personally been in these meetings with the CEOs of these companies and their owners and what we are back leading with brands and innovation and creating news and excitement and driving traffic not just to the websites, but back into the stores.
Great. And then any difference in terms of the Europe and your U.S. and Europe businesses that would prevent Europe from kind of getting the momentum we have in the U.S. Can you just kind of export the success you've had in the U.S. on certain product lines or are there differences, I know you’re first of all a competitive business.
No, it could to be blunt. It's harder, because it's mostly aquatic you know. Catcher [ph] is based in LA and Germany and it's a bigger aquatics market there. We've had success introducing our companion animal you know and obviously we've been – all the investments we’ve made, except GloFish has been around the dog and cat companion animal space which has higher CAGR.
The issue there on the dog and cat, it’s small. You know I'm sick of talking about it on conference calls, but it's less than $100 million of revenue. It used to make us you know $7 million to $10 million EBITDA, it became a $7 million lead and I am doing my best to make that neutral this year and try to clean that up.
Great, thanks. Best of luck.
Okay, next call operator please.
Your next question is from the line of Joe Altobello.
Thanks guys.
Hi Joe.
Good morning. So the question, I think it's been asked a couple of times already, but I wanted to go at it one more time I suppose. You know if you look at what's happened to the businesses since November, you mentioned David that you delayed tariff related pricing. You’re seeing a little bit more weakness in HHI on a softer housing market. FX got worse and still you kept reaching our guidance change. So I'm just curious, I know all of these probably aren't huge in and of themselves, but they all went against you. So what got better to keep you comp in that 560 to 580 number?
I’ll let Doug take a swing. If he doesn’t get it, I’ll follow-up.
So the impact Joe on tariffs is actually I think de-risk the P&L a little bit, because we had – our assumption was we were able to price for the tariffs and price for them as they went into FX. So we had those pricing plans ready and we’ve left on the shelf and so I think the further we get into the year, the less we have to price and the less pressure we have from consumers ultimately into our retail partners on that particular issue.
On FX it’s had a greater top-line relative to the greater top-line impact from the translation perspective than bottom line for us and then finally I'd say that you know we’ve put a range out there for a lease and we are still confident in the range.
Got it and then secondly on pricing, obviously everybody in these businesses are still in the same FX right of higher commodity transportation tariffs. What has been the competitive response in those businesses where you did take prices?
I thank in most of the cases other people are trying to take prices too. I think we do have some examples where competitors are not following yet and we got to monitor that. You know so it’s – you know listen this is a dynamic business and you know there's lots of ways to do things. Do you put more in store, you know joint marketing efforts, etcetera. You know do you – you know it’s mostly people are taking prices. I think you can see Clorox's number. They attribute taking pricing to restore their entire margin structure and it's just you know where you have the strongest brands and dominance share, its easer to take.
Okay, great. Thank you, guys.
Thanks Joe. Operator next question please.
Your next question is from the line of Ian Zaffino.
Okay great, thank you. Just touching on the strength in Pet, I guess in the U.S. can you just get into that a little bit more as far as you know is it the channel that improves or you just lapping destocking, new innovation, maybe just touch a little bit on that and kind of what you are seeing there and why it's been improving so well. Thanks.
Yeah, no listen Ian, thank you. Again, I’ve been talking about this you know for over a year and finally it's happening, but look, the team has reunderwritten the business. I think that unit prior to Randy’s team and JP taken over specifically was depending on me to do the next acquisition and you know to be blunt, you know now they are innovating, now they’ve got a new product pipeline and now they are brining news and excitement to the customer and to the retail customers and the end consumers and so you know it's not just ferminator, it’s not digesteases and it's not just the anniversaring the raw hide recall.
It is really doing what we say we do, which is you know just behind the brand, bring innovation, bring news and excitement and yeah, increase the marketing spend and genuinely partner with our retail partners. And so you know I'm excited. I think they are finally starting to correct the cultures healthy and NPD pipelines getting better. So we got to just stay at it. We are not -- lots more to do and lots more improvements to make.
Okay, and on the Energizer state, is there like a holding period for that or how do you think about that piece, thanks?
Listen, I think you know – listen, those guys have been phenomenal partners. They are terrific operators and marketers and I think you know they are going to be able to take Rayovac to the next level. I think both of those deals are you know – the industrial logic is exceedingly strategic, I think the synergies are real and we wanted to participate in the upside there and you know I'm not saying that it's you know going – you know auto is going to just turn around overnight, but they’ve got iconic brands, they've got great market share and you know Dayton was 80% of the way there when we handed it off and they are going to take it the rest.
So I look at it as a way where you know we can partner with them, but we can also participate in the upside.
I mean when we bought auto it was 130-ish in EBITDA , we got it to 145 and then 150 by the time we were – before we did the 5:1 consolidation which really derailed the earnings power of the company, but I'm hoping they can they can chip away at that and get that back.
I think we hold the stock for at least a year. We are happy to be long term holders and participate in the upside there. I have the utmost respect for their team, for Alan, for Mark and we’re their biggest fans.
Okay, thanks a lot.
Okay, operator next question please.
Your next question from the line of Sam Reid.
Hey guys, thanks for taking my question. I wanted to drill down a bit more on Personal Care here and I've actually got a two part question. So first you know could you give us a sense as to how big eCom is as a proportion of your total Personal Care sales. And then second, you know just personal care eCom sales in the U.S. specifically, how did that growth trend in fiscal 2018? Could you kind of give us a sense as to how it might have trended in 1Q versus that 2018 growth?
Yeah eCom is representing around you know 17% to 18% of that business and continues to grow. I think – look, I think we were kind of a first mover there to be honest and I think we did a very, very good job for you know three, four years ago, getting out there, getting the ratings, getting the growth. I think our competition kind of caught on to that, and you know it's kind of made it you know more expensive to deploy and we are not getting the yield we used to get and so that’s another area that I’m going to be investing in to not only grow our business but make it tougher on our competitors.
And look, I think on the Personal Care side, to be blunt, that's where we suffered the most de-listings in the period a year ago, so that why we are having such tough comps right now. We need to regain those listings and what we have in a lot of areas.
Our actual Home Appliance business EBITDA actually grew this quarter by a couple of million bucks. So Home Appliances is already kind of getting stabilized, but we really got to fix Personal Care. And when I say Person Care, I mean Personal Care U.S. Personal Care Europe has done a phenomenal job and that's why we did this partnership with Manu. It’s global so we do expect to benefit in the U.S. but you know Remington is number one over there and has tremendous growth trajectory.
Did I get your question?
You did, you did, thank you so much. And if I could sneak a follow-up question in here as well, it’s good to hear your upbeat on Home & Garden. That’s at – I just kind of wanted to get a sense as to how your inventory here look at retail in the segment specifically and how you think the inventory cycle at retail will play out over the course of this year and in those segments? Thanks.
Doug, go ahead.
Yeah we think we exited the last fiscal year in good shape in those, and you know that’s a very seasonal business. So we are right now shipping, beginning to ship this season and expect that with our new listing wins that we will have really nice representation at shelf where most of our – or a lot of our customers in a way buy these products and you know we had a capacity in both liquids and aerosols over the last couple of years. So we have a better opportunity to manage our inventory positions as well and improve working capital there as well as being able to respond quickly to demand changes. So things are looking good for our season.
And then listen, just a follow-on that, that you know Home & Garden when I sat down with Randy back in the spring and in the summer and I said ‘look, you know we have tremendous brands. You know we don't have a glyciphage [ph] in the product and you know we've got a great story to tell. And so this year, again part of our investment marketing were in support. You know we are putting millions of dollars for the first time behind [inaudible] and we are partnering with retailers and it's caused us to gain share and listings and we're in it to win it.
And so look, yeah weather has to cooperate, but I'm very bullish on Home & Garden. We've got a great team here, we’ve got great products, we got great innovation, we got great pricing and we're going to bring more value to our retailers by partnering on marketing initiatives there, and I think the payback is going to be very fast.
Awesome! Thanks so much guys, I appreciate it.
Okay operator, we have time to squeeze in one final call before we end the call please.
Your final question is from the line of Karru Martinson.
Good morning, guys. Just on the old outage that you guys always offered value for less. I mean I'm hearing a lot of partnering with retailers, advertising, brand support, you know stepping up behind them. You know.
You know, it’s an new Spectrum brand.
Absolutely! So how should we think about that spend as we go forward?
No look, that's a very good question and look, I'll just take a take one example and I won't go into too much detail, but you know I expected – one piece of the program is about a $2.5 million spend. I think it will result in a $20 million $30 million pick-up of new revenue and based on contribution margins, that will pay back faster than a year and obviously we are trying to allocate tens of millions of dollars in that same fashion.
We are not all the way there yet. We are only a quarter in the year and it's a marathon not a sprint. But you know I’ve also put in a new – I’ve got an entire new analytics group working with me on looking at the return on the spend and making sure we are accountable on it, where I don't think that was done in the past.
So listen, value doesn't mean cheap. You can great value, with a quick set product, with you know tremendous value through our smart key technology, through Bluetooth, through Wi-Fi and it can be $100 to $200 price point.
I think the more, more, more thing is we just try to be too many things with too many people. I want to be an inch wide, a mile deep, I want laser focus and yeah we are going to be investing in innovation, we're going to be investing behind the brands and we are going to be communicating to our customers. We didn't do that in the past, but that’s definitely what we are doing in the future. We are we creating a faster, smarter, stronger company.
Okay and then just – just so we are clear, the 3.5 leverage target, that is a gross leverage target from the 4.6 gross today?
No, because you know look, I don't want to pigeon hole. You know if you think about, if I run the math over the next six to nine months and I've got $1 billion sitting in a checking account, an undrawn revolver of $800 million, that’s probably too much liquidity.
And so if you look at the liability side, yeah we pay down $2.2 billion and that’s going to generate a lot of free cash flow going forward, but is there more to do? Right and are there other capital allocation decisions to be made. And so we just – listen, we have been moving at break neck pace. I think kind of we've got things stable, I feel good about the outlook.
Again, this is the year stability and reinvest in the business to position us to grow in 2020, but I want it very healthy and liquid balance sheet. I’ve said on multiple calls I want to run the company more conservatively from a P&L and a balance sheet standpoint and we're going to take our time. But I think you know give us the next 30, 60 days to look at market conditions.
I mean listen, it wasn't till three four weeks ago I could have bought back (inaudible) at a discount, now I can't. You know me, my background. I want to maximize returns for shareholders again. So let's look at the environment around us, let’s reassess where things are, we’ll make some decisions and we’ll communicate them when we do.
Thank you very much guys for your time. I appreciate it.
Thank you, Karru. And with that we have reached the top of the hour. So we will conclude our conference call. I certainly want to thank both David and Dough and on behalf of all of us here at Spectrum Brands, thank you all for participating in our fiscal 2019 first quarter earnings call. Have a good day! Thank you.
This concludes today’s earnings conference call. Thank you for your participation. You may now disconnect.