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Text: I am Jeremy Smeltser, Chief Financial Officer of Spectrum Brands.
As many of you know, Kevin Kim left Spectrum for another opportunity at the end of Q4, so I will moderate today's call.
This document will remain there following our call.
Actual results may differ materially.
Appreciate everybody joining us today.
On behalf of all of those at Spectrum Brands, I'm particularly pleased to report that full year fiscal '21 total Company sales were $4.614 billion, an increase of $650 million over the period a year ago.
Adjusted EBITDA was $689.2 million, increasing $109 million over the period a year ago and our adjusted diluted earnings per share was $6.53.
We have faced significant tariff costs, we've worked through a global pandemic, we have experienced unprecedented global supply chain challenges and inflation and yet we still succeeded in executing on our strategic playbook and delivering on all our financial goals.
Looking back at fiscal '21, we've a lot to be proud of as we have continued to leverage our developing centers of excellence to allow our business units to focus their efforts on truly knowing our consumers.
The focus is on efficiently using data to understand the needs of our end users in each category, meeting those needs through increased investment in new product innovation and telling that story to our consumers through enhanced brand messaging and product promotions.
Our fiscal '21 and fourth quarter financial results reflect our continuing trend of delivering on commitments quarter-after-quarter, while navigating the challenging supply chain environment we all face.
We are confident in our ability to face these inflationary pressures and supply chain disruption headwinds with the same focus and discipline as we look forward to another successful year in fiscal 2022.
Fiscal '21 has also been a transformative year for our Company, as we have completed a number of strategic transactions.
In addition to the tuck-in acquisitions in our Global Pet Care unit and our Home & Garden business, as we previously disclosed, we have entered into an agreement to sell our HHI business for $4.3 billion in cash to ASSA ABLOY.
The transaction is subject to the customary regulatory approvals in the US and abroad, all of which are advancing nicely.
Also, from a capital allocation perspective, we did repurchase 1.6 million shares of our common stock for approximately $125.8 million.
Turning to slide 6.
Here, we have an overview of the pro forma results of total Spectrum Brands, including HHI on a comparable basis to last year consistent with our earnings framework.
Total pro forma Spectrum Brands results were in line with our earnings framework of mid-teen top line growth with revenue actually accelerating 16.4%, and we delivered adjusted EBITDA growth in the high teens at 18.8% growth.
We also delivered adjusted free cash flow of $273 million as compared to our earnings framework of $260 million to $280 million.
We are extremely pleased to report that we grew revenue by $650 million this fiscal year, and we grew our adjusted EBITDA by $109 million, delivering on the earnings framework we communicated to our shareholders in a very challenging operating environment.
And we're extremely proud of the global team for making this happen.
We've maintained our strategy of investing in insights, innovation and advertising at an elevated level across each of our businesses despite significant inflation headwinds within the quarter.
We experienced accelerated inflation levels, in line with our expectations, and we currently foresee these headwinds continuing throughout our fiscal 2022.
The team has done an exceptional job of managing our profitability, while continuing to invest in our future growth despite the challenges faced during the quarter.
We remain committed to maintaining our focus on long-term sustainable growth, and we will continue to invest in the business.
Moving on to slide 7.
We again delivered top and bottom-line growth this quarter, including the impact of acquisitions.
Organic sales, excluding the impact of FX and acquisitions, actually decreased 3.4% in the quarter as we compare the results of the fourth quarter of fiscal 2020, which was an exceptionally high sales quarter due to recovery from COVID-driven supply disruptions in the third quarter of fiscal 2020.
As a reminder, we did have six fewer shipping days in the fourth quarter versus the same period a year ago.
The decrease in shipping days, as well as the ongoing pandemic-related global supply chain disruptions, adversely impacted our sales this quarter.
However, compared to the more normal operating environment of our fourth quarter of fiscal of 2019, these results actually represent double-digit organic sales growth.
Turning now to the bottom line.
Fourth quarter net income from continuing operations was $6.1 million compared to a loss of $9.6 million during the fourth quarter of last year.
Adjusted EBITDA for the quarter was $79 million, resulting from volume growth, pricing actions, our Global Productivity Improvement Program savings and favorable comparisons to last year's variable compensation change from stock to cash payouts.
This was partially offset by pressure from inflation and incremental investments.
We remain committed to maintaining our focus on long-term sustainable growth, and we will continue to invest in our businesses going forward.
Our balance sheet remains strong, and we ended the year with net leverage of about 3.5 times, and we have over $760 million in total liquidity.
We were also able to fund $490 million worth of acquisitions during the past year without substantially increasing our leverage ratio.
Also, from a capital allocation perspective, we did repurchased 1.6 million shares of our common stock for approximately $125.8 million.
As we discussed on our HHI transaction announcement call in September, we expect to deleverage our balance sheet to approximately 2.5 times gross leverage upon the closure of the HHI sale.
We have subsequently adjusted our long-term net leverage range to a more conservative 2 to 2.5 times net leverage.
Our capital allocation priorities continue to focus first on allocating capital internally to our highest return opportunities.
This includes strengthening our brands through consumer insights, innovation, advertising and marketing to drive vitality and profitable organic growth.
Secondly, we plan to return cash to shareholders via dividends and opportunistic share repurchases.
Third, we will continue with disciplined strategic M&A transactions that are synergistic and help drive long-term value creation.
We believe this strategy will further enhance Spectrum's position as a home essentials company, focused on meeting consumer demand through our greatest brands and innovative product offerings.
Moving now to slide 9.
And our high-level fiscal 2022 earnings framework.
We will continue to focus on executing our winning playbook, and we expect to grow the top line in the mid-to-high single digits.
Adjusted EBITDA, we plan to grow in the low-single digits.
This is after absorbing an expected additional level of inflation of around $230 million to $250 million.
We expect the current step-up in inflationary pressures to continue throughout fiscal 2022 and the year-over-year impact will be more acute in our first half reporting of the year.
We've implemented price increases in fiscal '21, and we've put in place further price actions in the first half of this year to counter these headwinds.
Our goal is to achieve approximately 70% to 80% price coverage for inflation by the end of fiscal 2022, but we do expect our first half margins to be pressured due to the timing of these price increases.
One of our key focus areas during fiscal '22 will be improving product availability to meet the continued elevated demand across our business units as we expect the global supply chain constraints to remain in place.
Now you'll hear more from Jeremy on the financials and then Randy will come and provide you an update on additional business unit insights.
Net sales increased 2.8%.
Excluding the impact of $5.1 million of favorable foreign exchange and acquisition sales of $41.2 million, organic net sales decreased 3.4% as fourth quarter fiscal '20 was an exceptionally high sales quarter for both Global Pet Care and Home & Garden due to recovery after COVID-driven supply disruptions in Q3 fiscal 2020.
HPC registered another quarter of growth.
Results were also negatively impacted by the six fewer shipping days in the current quarter versus fourth quarter last year, as David mentioned.
Gross profit increased $4 million and gross margins of 34.1% decreased 40 basis points, driven by commodity and freight inflation, partially offset by favorable pricing, mix and improved productivity from the Company's Global Productivity Improvement Program.
Overall, given the inflationary pressures, we are pleased with the gross margin performance in the quarter.
SG&A expense of $218.2 million increased 8.8% at 28.8% of net sales, with the dollar increase driven by acquisitions, higher marketing investments and inflation.
Operating income declined from $30.5 million to a loss of $4 million, driven by higher restructuring and transaction-related expenses.
Net income and diluted earnings per share increased due to a tax benefit, driven primarily by the release of certain valuation allowances.
Adjusted diluted earnings per share decreased 2.6% due to the decline in operating income from higher SG&A.
Adjusted EBITDA increased 8.5% primarily driven by volume growth from acquisitions, as well as productivity improvements and positive pricing, partially offsetting margin pressure from commodity and freight inflation.
Recall that we had a change in our incentive compensation payout methodology during Q4 of last year that resulted in a reduction of stock-based compensation expense and consolidated adjusted EBITDA of $12.7 million during the fourth quarter of fiscal 2020.
Turning to slide 12.
Q4 interest expense from continuing operations of $20.1 million decreased $4.2 million.
Cash taxes during the quarter of $6.3 million were $1.1 million lower than last year.
Depreciation and amortization from continuing operations of $29.6 million was $2.9 million higher than the prior year.
Separately, share and incentive-based compensation increased by $8.2 million from last year to $7.5 million driven by a change to incentive compensation payout methodology in last year's fourth quarter, which resulted in a reduction of stock-based comp expense for Q4 and the full year in fiscal 2020.
Cash payments for transactions were $6 million, down from $6.2 million last year.
Restructuring and related payments in the fourth quarter were $13.6 million versus $10.3 million last year.
Moving to the balance sheet.
The Company had a cash balance of $188 million and approximately $575 million available on its $600 million cash flow revolver.
Debt outstanding was approximately $2.5 billion, consisting of approximately $2 billion of senior unsecured notes, nearly $400 million in term loans and just over $100 million of finance, leases and other obligations.
Additionally, net leverage was 3.5 times at the end of the fiscal 2021.
Capital expenditures were $23.2 million in the quarter versus $16.5 million last year.
Let's turn now to slide 13.
Here, we have an overview of full year continuing operations results.
Net sales increased 14.3%.
Excluding the impact of $49.5 million of favorable foreign exchange and acquisition sales of $122.7 million, organic net sales increased 7.8%, as we experienced growth across all businesses with double-digit organic growth in our Home & Personal Care business.
The sales performance was driven by strong consumer demand in the first half of fiscal '21 and favorable comparisons to COVID-related closures across most regions in fiscal 2020.
Gross profit increased $157 million and gross margins of 34.5% increased 100 basis points, driven by favorable pricing, mix and improved productivity from the Company's GPIP program partially offset by commodity and freight inflation.
We are very pleased with the gross margin performance despite the inflationary headwinds.
Adjusted EBITDA increased 21% primarily driven by volume growth, including acquisitions, as well as productivity improvements and positive pricing, partially offset by margin pressure from commodity and freight inflation.
Turning now to slide 14 and our expectations for fiscal 2022.
We currently expect mid-to-high single digit reported net sales growth in 2022, with foreign exchange expected to have a slightly positive impact based upon current rates.
Adjusted EBITDA is expected to grow low-single digits.
This includes continued benefits from our GPIP program and approximately eight months of results from the recent Rejuvenate transaction, which, last fiscal year, generated about $66 million of full year revenue.
EBITDA is expected to grow despite incremental inflation headwinds of $230 million to $250 million, 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, we expect first half and specifically the first quarter to be most negatively impacted by inflation pressures on a net basis.
Depreciation and amortization is expected to be between $120 million and $130 million, including stock-based comp of approximately $25 million to $30 million.
Full year interest expense is expected to be between $80 million and $90 million, including approximately $5 million of non-cash items.
Restructuring and transaction-related cash spending is expected to be between $55 million and $60 million.
Capital expenditures are expected to be between $95 million and $105 million.
We ended fiscal '21 with approximately $725 million of usable federal NOLs and expect to use substantially all of them to offset the gain on the sale of HHI.
We are projecting to be a US taxpayer in fiscal 2022.
Cash taxes are expected to be between $20 million and $30 million.
For adjusted EPS, we use a tax rate of 25% including state taxes.
Regarding our capital allocation strategy, after the closure of the HHI sale, we're targeting a near-term gross leverage target with approximately 2.5 times.
After full deployment of the HHI proceeds, we are targeting 2 to 2.5 times net leverage for our long-term target.
So lastly, we plan to continue to invest behind our brands at the higher rates to support the execution of our strategy.
Moving to slide 15.
First, GAAP accounting for discontinued operations will allow us to allocate about $40 million to $45 million of interest to discontinued operations for the full year fiscal 2022.
Our actual expected interest expense reduction is about $20 million higher than that on an annual basis after planned debt reductions.
Continuing operations will carry about $20 million higher interest expense than we would expect in fiscal 2023, all else being equal.
Second, as compared to our historical allocation approach to HHI, technical GAAP accounting will not allow us to allocate approximately $20 million of center-led cost to discontinued operations in our GAAP financials.
After the sale closes, we would expect to be reimbursed for these costs under TSAs and our contractual agreements with the buyer for periods ranging from 6 to 24 months depending on the enabling function and region of the world.
Post those TSAs, we will address any remaining stranded costs, consistent with our approach in our past material asset sales.
Next, our year-over-year results are expected to be stronger in the second half of fiscal '22 as compared to the first half, essentially opposite of our quarterly results in fiscal '21 due to the timing of the impact of inflation hitting our cost lines and the continued increasing pricing actions taking effect as the year progresses.
And finally, from a cash flow and working capital perspective, a few notable items to point out.
First, HHI's free cash flow will not be presented in continuing operations for any period reported.
Second, continuing operations free cash flow will be reduced by the $20 million of interest that I mentioned earlier.
Third, we expect heavier than normal investments and capital expenditures, primarily due to our investments in our new S/4 Hana SAP upgrade program of about $30 million to $40 million, as well as heavier cash spend in restructuring and acquisition and integration costs due to the sale of HHI, the S/4 Hana program, as well as the completion of the Global Pet Care DC transition in the US.
And finally, inventory levels are very difficult to predict this early in the year, given the global supply chain challenges and consumer demand.
We will maintain a bias toward fill rates as needed to support our retail customers, and thus the timing of potential inventory reductions after last year's investments in inventory is uncertain.
Now, I'll turn it to Randy for a more detailed look at our operations.
My comments today will focus on a review of each business unit to provide details on the underlying performance drivers of our operating results, and I will also update you on the current overall supply chain and cost environment, as well as the progress on our Global Productivity Improvement Program.
Overall, we continue to utilize our operating model to navigate the headwinds in the current business environment.
While our results remain volatile from quarter to quarter due to the impact of COVID-19, we believe the fundamentals of our product categories remain very strong.
Consumer demand in our categories continues to be positive and our brands continue to perform very well in their spaces.
Now let's dive into the specifics of each business.
Starting with Home & Personal Care which is slide 17.
Reported and organic net sales increased 2.3% and 1.1%, respectively.
Adjusted EBITDA decreased 36.1% to $14.5 million.
Net sales were driven by continued recovery in the hair and garment care offsetting a slight decline in kitchen appliances, primarily due to global supply chain delays, as well as an expected slowing of consumer demand in that category.
The US markets were most acutely impacted by transportation delays, but this was offset by strong growth in EMEA and Latin America.
Lower EBITDA was driven by increased freight expense, continued investments in marketing and advertising, as well as input cost inflation.
This was partially offset by pricing actions, higher volumes and productivity improvements.
Q4 represented the ninth consecutive quarter of year-on-year top line growth for this business.
Performance was driven by double-digit growth in garment care products and moderate growth in hair appliances, despite the significant transportation delays.
Our consistent commercial wins over the last two years and continued investments give us confidence in our plans to continue growing share and shelf space with our key retailers.
As we outlined in our previous calls, inflationary headwinds, as well as continued marketing investments in HPC in Q4 is only partially offset by our pricing and supplier partner initiatives.
This will put pressure on margins, however, we continue to work to mitigate the inflation impact as we enter fiscal 2022.
The timing of additional pricing action to address these increasing inflation pressures and supply challenges will further pressure margins in Q1.
Although our long-term focus in 2022 will remain on a consumer-led insights driven new product platform with incremental sales opportunities in the upcoming holiday season, our immediate focus is on improving supply availability, as we continue to face capacity and transportation challenges.
Moving to Global Pet Care, which is slide 18.
Reported net sales grew 9.1%, while organic net sales declined just under 1% due to six fewer shipping days in Q4 of fiscal '21 versus fiscal '20, as well as impacts from supply chain constraints.
Adjusted EBITDA grew 7.4% driven primarily by the impacts of acquisitions.
Profits were pressured by higher freight and input cost inflation, partially offset by productivity improvements and pricing actions.
We were able to overcome the third quarter fulfillment challenges from transitioning new 3PL provider at one of our US distribution centers that do see output level steadily improved throughout the quarter and finished above last year and at target rates by the end of the quarter.
Q4 represented a record 12th consecutive quarter of revenue growth for this business.
All top categories grew and sales to all top channels grew as well.
With the continued resurgence in the pet specialty brick and mortar channel, as consumers have returned to in-store shopping.
This is a great sign for the pet industry in general, as it's indicative of the strong consumer engagement that exists in the outlook for the category.
EBITDA was driven by the top line growth, including the impact of acquisitions.
Profits were pressured by higher freight and input cost inflation, partially offset by productivity improvements and pricing actions.
We remain confident that 2022 and beyond will benefit from the continued execution of our strategy, which is centered around introducing unique innovation in order to drive demand for our portfolio of leading brands.
The team is particularly excited to see the continued strong demand for the consumables products in this portfolio.
As we've discussed before, we've seen an influx of new pet parents into companion animal categories, a new hobbyist into the aquatics and reptile categories.
This bodes well for all the repeatedly purchased items in our portfolio, like dog and cat chews and treats, grooming tools and aids, bird and small animal foods, pet stain and odor removers and aquatic food filtration and water care products.
These products typically carry strong margins and represent a significant portion of our overall portfolio.
This is just another reason why we remain bullish about the continuing growth of this business.
And finally, Home & Garden, which is slide 19.
Fourth-quarter reported net sales decreased 7.3% and adjusted EBITDA decreased 19.4%.
However, the full year reported net sales increased over 10% and the adjusted EBITDA increased 10.6%, closing a very successful year for this business.
Fourth quarter net sales showed a decline across controls, household insecticides and repellents as last year's quarterly revenue was historically high, driven by the recovery of COVID-related supply disruptions in Q3 of fiscal 2020.
The impact was compounded by six fewer shipping days in Q4 of fiscal 2021.
The sales were also lower due to strategic exits of low-margin contract manufacturing business and non-strategic low-velocity SKUs.
Fourth-quarter sales were 28% ahead of a more normal Q4 fiscal '19, driven by organic growth from strong consumer demand and continued market share gains.
Our market data indicates that during Q4, we had double digit POS growth and in the 2021 season, we increased our overall leading market share position by an estimated 50 basis points.
We are also very excited about our new Rejuvenate cleaning business, which continues to perform in line with expectations, as we fully integrated into our operations.
The EBITDA decrease was driven by lower volumes and higher manufacturing and distribution costs, partially offset by pricing and productivity improvements.
The business continues to see higher product costs from raw materials and freight.
The business has announced another round of price increases that go into effect in this quarter to offset that cost pressure.
We are also targeting further pricing action in the first half to offset additional expected inflation.
We remain committed to our strategy to invest more resources to deliver truly innovative consumer solutions and tell our story around the brands of Spectracide, Cutter, Hot Shot, EcoLogic and now Rejuvenate.
We believe our continued strategic investments will further enhance our mission to be the recognized market leader in providing consumers the best solutions for conquering nature's challenges and enjoying life.
Now let's turn to our internal growth and efficiency efforts with our Global Productivity Improvement Program on slide 20.
We remain focused on continued success, execution of this program as we complete our global operating model transformation.
We are committed to our strategy of reinvesting these savings back into the business to drive long-term sustainable organic growth.
We are reaffirming our gross savings target of $200 million of savings by the end of fiscal 2022.
Our teams have already captured over $175 million of gross savings, since the program inception and this has helped us offset some of the adverse impacts of tariffs and inflation.
These amounts include the HHI business.
And adjusting for continuing operations only, the savings are about $150 million in total with approximately $135 million achieved through the end of fiscal 2021.
As we had anticipated, inflationary pressure further accelerated in this quarter and impacted our results in a meaningful way.
Although these inflationary trends are broad based with an industrywide impact, our quarterly results reflect the various actions we have undertaken to offset these cost pressures.
We are leveraging the many advantages of our new global operating model and utilizing the enhanced tools developed through our GPIP program to launch a coordinated response to these market forces.
The GPIP program is driving further productivity improvements in our processes and helping us partner with our suppliers to offset some of the inflation.
With the current constrained global supply chain environment, we expect these inflationary pressures to accelerate further in the current quarter.
We've also implemented further pricing increases with our retail partners in Q4 and are actively engaged in taking additional price in the first half of FY '22 to offset further incremental inflation.
While we will continue to make incremental investments to growth initiatives such as consumer insights, R&D and marketing across each of the businesses, we believe supply chain improvement and resiliency must continue to be an area of focus for us in fiscal '22 as we work to improve product availability, while simultaneously finding ways to mitigate the cost pressures coming through the global supply chain.
Now back to David.
I'd like to take just a few minutes here to recap the key takeaways here on slide 22.
First, our fourth quarter financial results conclude a very successful fiscal '21 for us, where we saw a 14% growth in sales and a 21% growth in adjusted EBITDA from continuing operations.
The progress from our Spectrum family to improve our business is nothing short of remarkable.
We've once again delivered strong results in the face of globally constrained supply chains and an accelerating inflation backdrop by continuing to invest in our long-term growth and find ways to offset the inflationary pressures through both price and productivity.
We've demonstrated great discipline on our capital allocation process, as well as business operations.
Our Global Productivity Improvement Program is delivering the savings we committed to, and we continue to reinvest those savings into long-term growth of the Company.
Secondly, we are driving a strategic shift for Spectrum Brands with the sale of our HHI business for $4.3 billion.
As mentioned earlier, the process is progressing well and it's going through the customary regulatory review.
We expect to deleverage the balance sheet to approximately 2.5 times gross leverage upon the closure of the HHI sale, and we have adjusted our long-term average leverage target range to a more conservative 2 to 2.5 times net leverage.
In addition, we expect to have approximately $2 billion of capital to deploy and to maintain this target leverage range.
Third, the momentum in our operating businesses remains positive, despite inflationary pressures and global supply constraints.
We expect inflation to accelerate in fiscal 2022.
We've already launched a coordinated response to this through pricing actions and productivity programs.
I'm personally very optimistic about the future of our businesses, and I'm proud of the way the team has come together to face the many challenges during fiscal 2021.
As I mentioned earlier, the Company's culture has shifted to focus more than ever on the long-term growth and profitability of our businesses.
And though we continue to face a challenged global supply chain, this management team has demonstrated the discipline to operate efficiently and maintain profitability, while continuing to invest in the future.
On the demand side of the equation, we have experienced a sustained demand shift to a higher level of consumption in our Global Pet Care and Home & Garden businesses.
We expect to continue this strong growth momentum in fiscal 2022.
The macroeconomic environment remains favorable, as we enter the peak holiday season, which bodes well for our Home & Personal Care businesses.
Overall, we are a more efficient Company today, and we are reinvesting much of the savings from our Global Productivity Improvement Program back into driving the growth of our three businesses.
In summary, we maintain a favorable outlook for fiscal '22 and beyond, despite the various challenges over the next couple of quarters.
The continued energy of our teams and the investments we're making in insights, innovation and advertising leave me enthusiastic about our new product development pipeline and our expected new launches in fiscal '22 and fiscal 2023.
The future of Spectrum Brands is genuinely bright, as we continue to make living better at home.
I'm extremely grateful for all the sacrifices our Spectrum Brands employees have made to navigate our Company successfully through these challenging times.
Hey Josh, can you kick off the Q&A for us, please?

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sees mid to high single-digit reported net sales growth in fiscal 2022.

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