Spectrum Brands Holdings Inc (SPB) 2012 Q4 法說會逐字稿

Good afternoon. My name is Kyle and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands fiscal 2012 full year 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, Wednesday, November 14, 2012. Thank you.

I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Good afternoon, and welcome to Spectrum Brands Holdings fiscal 2012 earnings conference call and audio webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today. Joining me to lead the call are Dave Lumley, our Chief Executive Officer; and Tony Genito, our Chief Financial Officer. Also with us today for the Q&A session are Terry Polistina, President, Global Appliances; and John Heil, President of Global Pet Supplies.

Now, our comments today include forward-looking statements, including our outlook for fiscal 2013 and beyond. These statements are based upon Management's current expectations, projections and assumptions, and they are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated November 14, 2012, and in our most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statements.

Also, please note that we will discuss certain non-GAAP financial measures throughout this call. Reconciliations on a GAAP basis for these measures are included in this afternoon's press release and our 8-K filing, and they are both available on our website in the Investor Relations section.

Now, let me quickly review our GAAP results. For the fourth quarter of fiscal 2012, the Company reported net income of $5.5 million, or $0.10 per diluted income per share on average shares and common stock equivalents outstanding of 53.1 million. This compared to a net loss of $33.8 million, or $0.65 per diluted loss per share in the year-ago quarter, which was based upon average shares and common stock equivalents outstanding of 51.9 million.

Now, by segment for the fourth quarter of fiscal 2012, the Global Batteries and Appliances segment reported net income as adjusted of $55.2 million versus $24.8 million a year earlier. The Global Pet Supplies segment reported net income as adjusted of $23.1 million in fiscal 2012's fourth quarter, versus net income as adjusted of $6.3 million in fiscal 2011. And finally, the Home and Garden Business segment reported net income as adjusted of $11.9 million in the fourth quarter of fiscal 2012 versus net income as adjusted of $12.9 million last year.

With that, I'm pleased to turn the call over now to our Chief Executive Officer, Dave Lumley.

Thanks, Dave. And thank you all for joining us today.

These are exciting times at Spectrum Brands. The record fiscal 2012 results we just reported provides strong momentum as we focus on delivering another year of measured improvement in 2013. And as we near the closing on our exciting and accretive acquisition of HHI, which is expected before the end of the calendar year, our record 2012 performance met or exceeded our financial guidance. It was highlighted by strong growth in net income, EPS -- both on a GAAP and adjusted basis -- and adjusted EBITDA. This, along with record free cash flow of $208 million, or approximately $4 per common share. These numbers were delivered in spite of extraordinary negative foreign currency impacts, challenging global economies including the financial crisis in Europe, cautious restrained consumer spending, and ongoing major commodity and Asian supply chain cost increases.

In fiscal 2012, we also swung to net income of $48.6 million and EPS of $0.91 from a loss of $75 million or $1.47 per share in 2011. More importantly, on an adjusted non-GAAP basis, our 2012 EPS jumped 25% to $2.28 from $1.83. This, our third consecutive year of increased adjusted EPS, record net sales of $3.25 billion, an increase of 2.1% versus last year, and in line with our guidance, at or above the rate of GDP, and our operating income increase of an impressive 32%.

It is our third consecutive year of record adjusted EBITDA, $485 million, a solid 6% increase versus 2011. And grew about three times the rates of our net sales gain. Now, on a constant currency basis, our results were even stronger, and I believe more noteworthy. For example, net sales increased 4.3% and adjusted EBITDA grew at a solid 10%, or more than two times the growth rate of our sales.

What does our record performance mean? It says Spectrum Brands has an important role in the global consumer goods marketplace. We are winning, with a balanced combination of volume growth, retail distribution gains, new products, geographic expansions, select pricing actions, continued spending controls, and investment paybacks from our global cost improvement programs. Our results reinforce the importance of our largely non-discretionary, non-premium price replacement products and the returns they provide to our retail partners and consumers worldwide, especially in difficult economic times.

Our acquisitions of Black Flag and FURminator in early fiscal 2012 were solid contributors to our record performance. These two businesses were fully and quickly integrated, ahead of schedule and above initial synergy targets. They will remain significant contributors in fiscal 2013 and beyond.

Our primary financial goal and strength, which is strong and consistent free cash flow generation, was evident again in 2012. We delivered record free cash flow of $208 million, or approximately $4 per common share, as I said earlier, on an increase from $190 million in 2011. Finally, our fiscal 2012 year-end target leverage ratio of approximately 3.4 times was achieved due to term loan voluntary prepayments of $150 million in the fourth quarter. Over the long-term, our objective is to maintain a total leverage ratio in the range of 2.5 to 3.5 times.

Our steady growth is being driven in large part by our Spectrum Value Model. We think it continues to be the right go-to-market strategy for retailers and customers who sell and purchase our largely everyday replacement products. Our Spectrum Value Model delivers real value to the consumer, with products that work as well or better than our competitors for a lower cost. It provides higher margins and lower acquisition costs to our retail customers, along with retail category growth and market share gains. We continue to believe consumers are embracing our same-performance-for-less-price, value brand proposition versus both premium price competitors and private label approaches. We are also increasing trial and brand conversion through our strategy. As a result, we continue to generally outperform our competition and our market categories.

Let's turn to our individual businesses. First, Global Pet Supplies. They delivered record sales and a fifth consecutive year of EBITDA growth in fiscal 2012. Its EBITDA margin increased a solid 120 basis points. In short, it was a breakout year for this business. Pet's net sales and profit growth were primarily driven by a turnaround in North American aquatics -- in fact, five straight quarters of year-over-year net sales growth -- the positive impact of high margin FURminator acquisition, and an over-delivery of global integration and continuous improvement savings. Pet benefited from first half distribution wins and new product launches throughout the year, in both aquatics and companion animal categories, along with select and targeted pricing actions. We're pleased with Pet's performance and we see even better results ahead in fiscal 2013.

In Global Appliances, we experienced, as expected, major commodity and Asian supply chain cost increases in fiscal 2012, along with significant foreign exchange headwinds. Yet we were ready and in the end were able to offset most of these increases with global new product development programs, restructuring and integration cost synergy programs, retail distribution and share gains, and stringent expense controls. Our Personal Care business, part of this division, or Remington, delivered another record year, with increased net sales and adjusted EBITDA. Remington continues to win the global marketplace from a combination of new products for men and women, product line extension, geographic expansion, and distribution gains.

Among bright spots last year was solid growth in our European shaving and grooming businesses. As evidenced by our announcement of a 56% controlling stake in Shaser Bioscience, our major Remington initiative is to expand our consumables product line at a faster rate than durables. The Shaser acquisition significantly enhances our position in more than the $50 billion global market for home use dermatology and hair removal devices. We expect the acquisition to add substantial incremental revenue to Remington's consumables business, approximately doubling consumables' revenues in 2013 and continuing rapid top line growth in fiscal 2014.

US women's hair care accessories are a recent addition to growing our higher margin consumables business. We have had initial success at several key retailers in the $1 billion US market for women's hair care accessories. Our i-LIGHT Pro hair removal system, part of the Shaser acquisition, continues to sell well in Europe and the US. In the coming months, you will hear exciting news about our expansion of our Remington consumables business. Finally, Remington is the foundation for our increasing Company-wide investment in global eCommerce, which we see as a new platform for higher margin growth across Spectrum Brands.

In the home category of Global Appliances, products like Black & Decker and George Foreman, we delivered solid revenue growth in both Latin America and Europe, including eastern Europe, where expansion is progressing well. In fact, we rolled out Russell Hobbs products in 23 new European markets through our own organization, achieving new sales in fiscal 2012. In North America, lower results were due to the fact that the level of Asian and commodity cost increases were more than we were able to price for and/or offset with cost improvements.

As we told you throughout last year, we did reduce the base North American business with a phase-out or replacement of low margin appliances, eliminating approximately $30 million in sales. In fiscal 2013, we will continue to work with our supply chain and retail partners to replace SKUs and brands where it makes sense to sustain our collective margins, given the cost pressures from Asian suppliers. However, we do see some indication that the rate of Asian cost increases should moderate somewhat this year from fiscal 2012 levels.

Fiscal 2012 was a success story for our other division, Home and Garden, which delivered record net sales and adjusted EBITDA of its own. At 22.5%, its adjusted EBITDA margin in 2012 represented the fourth consecutive year of improvement. Home and Garden has been a consistent success story for a number of years and with this adjusted EBITDA, more than doubling from $41 million in 2007 to $87 million in fiscal 2012, excluding the impact of exiting the growing products, or big bag business, in 2009.

Throughout the roller coaster weather patterns of the spring and summer season of 2012, Home and Garden outpaced its competition. Results show that its value alternatives are winning at the store shelves. Our core brands, such as Hot Shot, Cutter, and Repel, gained share. We performed ahead of category growth rates in controls, household, and repellents. Our Black Flag/TAT brands acquisition clearly was a major contributor to Home and Garden's record performance. Like FURminator for the Pet division, the accretive Black Flag acquisition was fully and quickly integrated ahead of schedule and with synergies exceeding our original target.

Operationally, Home and Garden implemented cost improvement programs to offset commodity pressures -- in point of fact, record cost improvements. Looking ahead, we have secured new and expanded listings at all major retailers again for fiscal 2013. We have exciting new product extensions set to launch in controls, repellent, and household categories. And with the Black Flag acquisition fully integrated, we have a detailed strategy for even more contribution from these brands in the coming year.

Lastly, let's talk about our Global Battery business, which we view as a growth vehicle for Spectrum Brands. It remains a strong EBITDA-producing cash flow generator, as evidenced by its record EBITDA in fiscal 2012. The point to leave you with is this -- Rayovac and Varta are winning with many existing retailers and new consumers. Our strategy of same or better performance for less continues to resonate with consumers.

Market shares are at record highs and points of distribution continue to climb to new accounts and existing ones. Important distribution gains secured in fiscal 2012 will bear fruit this holiday season, and especially next spring, here and abroad. For example, Rayovac today has its highest North American battery share ever, and so far this year, it is the fastest growing consumer battery brand in the United States. Our goal remains to help the retailer grow the category and increase market share.

Finally, we still expect to close the year end on our accretive acquisition of the Hardware and Home Improvement Group from Stanley Black & Decker. We remain very excited about the many compelling strategic and financial benefits this transaction will bring to Spectrum Brands in 2013 and beyond. Some of these include the addition of the leading maker of residential lock sets, residential builders' hardware and faucets, with number one positions in North key American markets; increases Spectrum Brands' top line growth and margins, and is expected to be immediately accretive to EPS, adjusted EBITDA, and free cash flow. It will significantly increase Spectrum Brands' scale, product breadth and geographic diversification.

It provides the ability to grow HHI further domestically, as well as internationally, by leveraging Spectrum Brands' global infrastructure and business model. It brings excellent additional growth opportunities, including entry into the integrated residential security, lighting, and fire categories, as well as the light commercial business. And strong free cash flow will enable Spectrum Brands to deleverage our balance sheet to return to higher end of the total ratio target of 2.5 to 3.5 times in approximately two years. In addition to all this, it further strengthens our relationships with our core retail partners and provides attractive cross-selling opportunities and creates a platform for significant future global growth.

So, in summary, we are excited. We also want to reaffirm plans to initiate our regular quarterly dividend of $0.25 per share in fiscal 2013 and evaluate increasing the dividend in future years based on free cash flow growth. Thank you for listening.

And now, to Tony, our CFO, for some additional comments.

Thanks, Dave. And good afternoon, everyone.

We were pleased with several key margin percentage increases in fiscal 2012. Operating income as a percentage of net sales improved over 200 basis points to 9.3% from 7.2% last year. For the sixth consecutive year, adjusted EBITDA as a percentage of net sales improved to 14.9%, rising from 14.3% in fiscal 2011; and back in fiscal 2007 was 11.7%.

Let's turn to our tax rate. Our fiscal 2012 effective tax rate was 55%, at the top end of our 45% to 55% guidance, and 80% for the fourth quarter. Our book income tax rate is impacted by our high level of profits in foreign jurisdictions. This means we provide for foreign income taxes, even while having a book loss in the United States. Our US book loss results from substantially all of our debt and integration and restructuring costs being incurred in our US entities. Since there is a valuation allowance against US deferred tax assets, we are unable to book any financial statement benefit related to our US domestic losses. This impact is magnified by the tax amortization of certain domestic and definite live intangible assets.

Let me highlight a few more key items in our financial statements. Cash restructuring, acquisition, and integration charges fell to $56 million versus $68 million from 2011. We expect a further decline in fiscal 2013 to $20 million to $25 million, as our major synergy and cost reduction programs have ended, primarily in Russell Hobbs and Global Pay. Cash interest for fiscal 2012 was $179 million compared to $172 million in 2011. Excluding one-time cash costs related to the refinancing of our term loan in 2011 of $6 million, and excluding one-time cash costs related to the refinancing of our 12% PIC notes in 2012 of $25 million, cash payments declined by $12 million in total.

Cash taxes for 2012 were $39 million lower than our projected range of $55 million to $60 million, primarily due to the timing of payments in Germany. Based on the level of NOLs we expect to be able to utilize, we do not anticipate being a US federal taxpayer for at least the next five years. However, we will continue to incur foreign and a very small amount of state cash taxes. Cash taxes are expected to be $55 million to $65 million in fiscal 2013, due to our overall higher foreign profits, but mainly due to the timing of payments, primarily in Germany. Excluding the timing of payments, cash taxes are expected to be $45 million to $55 million in the normal course.

We ended fiscal 2012 in a solid liquidity position, with no cash draws on our $300 million ABL working capital facility, and with a cash balance of about $158 million. As of the end of the year, total debt was $1.665 billion at par. Regarding our cash flow projections -- given the strong cash flow potential of our businesses, our goal is to generate at least $200 million of free cash flow, or approximately $4 per share in fiscal 2013.

We expect capital expenditures to approximate $50 million to $60 million in 2013, of which more than two-thirds will represent investments in battery production capacity, technology infrastructure, new product development, and cost reduction projects. Our capital expenditures will be higher in fiscal 2013 than our normal long-term run rate of $40 million to $45 million, due to the investments we are making in technology infrastructure, which we believe will accelerate research and development, new product enhancements, and new product introductions.

Thank you, and now back to Dave for Q&A.

Okay, thanks, Dave and Tony. And, Operator, would you please now begin the Q&A session. Thank you.

(Operator Instructions)

Dan Oppenheim, Credit Suisse.

Could you just talk about the battery business, talked about the growth that you've seen in Rayovac in terms of market share and such. How are you feeling about the holiday season here in terms of further share gains and just the battery business overall for this current quarter?

I'm feeling -- we're feeling pretty good. The -- most of all retailers have embraced batteries, the have more points of distribution in the store, which means all the battery companies have more points of distribution, but especially us. They -- you're seeing better traffic. They are doing more promotions. So I feel pretty darn good about it. December is the battery month, and the first week of January. So we're looking forward to it.

Okay, and I guess in terms of -- you talked about the consumables business in terms of personal care. How much more should we expect to see? Are you looking for further acquisitions in that area? And when do you expect to see more introductions in terms of men's wet shave and such? When would that come back?

I think as we look at the coming year, I think we have plenty to do between the Hardware Group and the Shaser acquisition and frankly, that's right on plan. Our hair care accessories have been internally developed and they are doing well. Shaser let's us drive the whole i-LIGHT business, and wet shave is a two-step proposition and we've got a really good partner, so I don't think you're going to see anything there in '13.

Okay. Thank you.

Lee Giordano, Imperial Capital.

Thanks. Good afternoon, everybody. Thinking about the Pet business and the Home and the Garden business, can you talk about the organic growth rate for those two businesses, excluding any acquisitions? Like, what type of growth should we think about going forward?

This is Dave Lumley. Both of them on an organic basis are growing in the single digits, both aquatics and companion animal. I think you'll see that continue to go that way. I think you have some isolated products in there that could do much better, as we move into, like, dog treats and things like in our Nature's Miracle line. Several of our key customers are doing extremely well in this category, especially customers. And we see a lot moving there. And for instance, our FURminator line I think we will do better than that. But I think this business can grow at most likely better than GDP and some of those in the high single digits. So we're very optimistic about the Pet business in '13.

Yes, I think it's probably good to note, Lee, that the aquatics business, we saw a turnaround, a stabilization and most important, a turnaround in North American aquatics. And that was really driven by actions that we took and we're actually growing, we're seeing a growth in the category, which is very positive. And we're gaining market share in that, which we were the market -- we are the market leader, but we continue to gain share. One of the things that we've identified is an opportunity to bring our learnings from North America to Europe with respect to the aquatics category, where it's been the typical on the lower side of the growth, low single digits. So, hopefully we can leverage all of our learnings in North America. And as Dave said, the companion animal category, it does grow at a faster rate than aquatics overall and really depends upon the specific product. But we're encouraged by what we've seen. And keep in mind that several years ago, we launched the introduction of companion animal products in Europe and we're seeing some nice growth in that geographic area. So as Dave said, we're excited.

Great, and then same question for Home and Garden. Is low single digits the right type of organic growth for that segment as well?

Yes, yes, it is.

And then just lastly, following up on the previous question, did you see any boost in the battery business from Hurricane Sandy in the northeast?

Yes, we did. Most of it, though, I know you saw the pictures of people with no batteries, but that was basically on iPhones, right? Most of it is lights, and so we saw very good uptick in lights and then of course D batteries. And so it did pretty well. Hurricanes usually can boost sales, depending on who you are, anywhere from $5 million, $10 million, for about a week or so. And then it gets back to normal.

Great. Thank you.

Thank you, Lee.

Reza Vahabzadeh, Barclays.

Good afternoon. I did take advantage of some of your lighting products, by the way, and the D batteries. Appreciate it, and hopefully you will restock them in the stores in the northeast.

Absolutely, thank you.

As far as line reviews for 2013 across your businesses, anything that you can, any color that you can provide on that as far as batteries and H&G in particular?

Well, you know, those line reviews are ongoing. The battery one's kind of done for a while, till the spring. The -- we did very well in Home and Garden, which we've said, very well. In Pet, we've done pretty well as well, and again, remember that we have business in the specialty stores and the small pet stores and then the large retailers. And we've done well there. The Remington's done very well in all its businesses. And the appliance business, as we've restaged it with our new products, so we -- there's no business we have that I would say that we are disappointed in line reviews.

Correct.

I think that our value proposition is being embraced as retailers look to balance their premium products with their value branded products, and in some cases, private label, depending on the industry. Although private label increasingly is becoming more risky if it's being imported from Asia due to all the reasons you've heard of. But pretty good. Pretty good. We're happy with it.

Got it. So you talked about the commodity costs that I assume are impacting your small appliance business. How should we think about that dynamic going forward? Will you be able to pull enough levers to mitigate the impact of higher commodity costs?

We're very cautiously optimistic that by midyear we think that the cost increases subsiding and the cost improvements and the global new product development miles we have could pull that back to even. It's been a long two, two and a half years here of cost increases, currencies, supply chain, and it's just not that they are increasing costs, they have cost increases. They have less government subsidies. They have problems in getting labor. They have shipment costs and consolidation costs. So it's going to be an interesting ride.

I think America, North America and South America, has a unique opportunity in the next three years to bring back manufacturing jobs, or assembly jobs as supply chain lead times and costs become more, higher. So I think you're going to see that happen. Unfortunately, for appliances, it will take more than three years. But economics drive these things. I think also, we've been very successful in moving within Asia, outside China to other countries, in Indonesia, Cambodia, and others. And I think you're going to see more of that as well.

So would--

Six more months to go I think at least before companies cannibal that and then it should get better.

Right. So within that division, can, can the higher sales and therefore EBITDA of the battery business, along with personal care offset any downward pressure in small appliances in 2013?

Oh, yes. Well, that's the plan. Clearly as batteries grow, that helps. Remington grows, that helps. The consumables investments we're making to grow hair accessories when we get into, more into wet shave and we get into the hair removal devices of i-LIGHT which has quite a robust platform of new products beyond the one that you've seen, the goal is that by the end of this fiscal year that we should be able to offset that and go buy it.

Got it.

I don't think that small appliances forever can be priced the way they are and have people lose money on them the way they have been. It's going -- it is changing.

Right. A couple of housekeeping items for Tony. What was cash restructuring in 2012? I didn't hear it. And what's it going to be in 2013?

For 2012, it was about $55 million, $56 million. And we said that for 2013, we would anticipate it to be $20 million to $25 million.

Got it. And then the cash tax number that you mentioned was a little bit higher than normal. Is that just a timing from 2012?

That's exactly right, Reza. That has to do with the timing of a German tax payment that was made, was supposed to be made in 2012, but because of -- it has to do with the way that taxes are paid in Germany. I don't want to get into the weeds, but basically you file your return and you make your final payment, once the government reviews the return and approves that, that is the payment, as opposed to the United States, as an example, where you would file your return, if you have an amount due, you would make a payment at that point as well. So we didn't get the notice to, that the final payment was approved until after the year end, fiscal year end. So it's a timing issue solely. Our normal run rate for taxes is, as I said, it's approximately, probably about $50 million range. That's where it typically should be, based on our current profile of our composition of US income versus foreign income and on a long-term range would be about $50 million.

Thank you much.

Thank you, Reza.

Operator, do we have any--

Carla Casella, JPMorgan.

Hi. Thanks for taking the question. I was wondering if you could just give us a little bit more color on the holiday. I guess specific to the battery business, how are retailers or the programs positioned this year versus last, and would you say that you've got greater strength in either any specific channel, food, drug, mass versus specialty toy?

Let me go through each one separately. I said earlier, the retailers have gotten behind battery sales more this year than in years past, and I would say that's true across the board, whether it's mass merchants, home centers, clubs, or food and drug. But especially mass merchants and home centers. So that's good news for the battery business, and us. Number two is the -- your question was how, how--

I guess where do you think you have --

How we're positioned?

-- the best opportunity? Yes.

Yes. Well, we -- Rayovac traditionally has been strong in mass merchants, home centers, and industrial channels, where our principal two competitors, which have been strong everywhere, but especially in food and drug, where we now I think have done better in our strongholds than before and we're entering in some of those other areas now where we wouldn't have the opportunity to do that before. Like I said, because retailers are looking to balance their offerings, and batteries is a great category because they make so much money on batteries, retailers do. So, to have a premium brand, just premium brands is not necessarily working too well, so having a premium brand and a value branded offering has been working real well, and I think we'll continue to see a trend in that direction.

Okay, great. And then on the, I guess on the small appliances, is there anything you do there in terms of packaging, or I guess basketing products for any kind of special holiday promotions, is it different this year versus past?

Yes, that's a great question. A lot of the retailers have done a great job of creating the experience buy or a package buy. Let me use an example of something we're not in. Popcorn makers and popcorn in a basket all displayed together, right? And they get the whole sale. I think you're going to see more and more of that small kitchen appliances, when you think of the tools that go with it or the pots and pans or the spatulas.

And we're starting to see them, starting to do that, some of the retailers in some departments I think you're going to see more and more of it. That will really help us, I believe, because we sell so many categories. Black & Decker is a leader in everything from irons and toasters to toaster ovens, then you get into coffee makers and blenders and all those things, usually the buyer wants them all to match if he or she can get it that way. So I see that as an exciting trend. And the retailers have told us they are working on it and we're trying to help them do it.

Now, clearly, you will see some cool things from us, which I can't tell you about, but on our George Foreman, where we've taken that even beyond that buy, but we've tied it to what most people like to do starting January 1, and that is to lose weight, right? And all the things that that could mean. And George Foreman can play a very big role in any healthy cooking, but more importantly, getting you kick started on weight loss. And we're putting a lot behind that this year. You're going to see it. I think it's an exciting development.

That's great. Thanks.

Okay, operator, looks like we've exhausted our questions, is that correct?

There are no further questions at this time.

All right. Well, with that, I think we will close down the call. Our thanks, of course, to Dave and Tony, and we will end the call, and on behalf of Spectrum Brands, all of us here do want to thank you for participating in our fiscal 2012 earnings call this afternoon. Have a good day, and we'll talk to you in the new year. Take care.

This concludes today's conference call. You may now disconnect.