Spectrum Brands Holdings Inc (SPB) 2018 Q1 法說會逐字稿

Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2018 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, February 8. 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, Jamie, and good morning to everybody. Welcome to Spectrum Brands Holdings Fiscal 2018 First Quarter Earnings Conference Call and Webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands, and I'll be your moderator for our call today.

Now to help you follow along with 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.

Now if we start with Slide 2 of this presentation, you'll see that our call, again, will be led by Andreas Rouvé, our Chief Executive Officer; and Doug Martin, our Chief Financial Officer. Andreas and Doug will deliver opening remarks and then conduct the Q&A session.

Now if we turn to Slides 3 and 4, you'll note that our comments today do include forward-looking statements, including our outlook for fiscal 2018 and beyond. These statements are based upon management's current expectations, projections and assumptions and 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 February 8, 2018, 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 am now pleased to turn the call over to our Chief Executive Officer, Andreas Rouvé.

Thanks, Dave, and thank you all for joining us. Turning to Slide 6. Our first quarter financial results have a different look following our announcement early January to classify our Global Batteries & Appliance segment as held-for-sale, and therefore, discontinued operations.

We delivered solid Q1 reported sales growth of 7% from continuing operations. Organic sales, net of acquisitions and the favorable currency impact, grew 2%. Hardware & Home Improvement led the way with double-digit growth and a record first quarter. Regionally, growth was driven by our core U.S. business.

In Pet, our sales were reduced, as expected, from our continuing and planned exit of a European dog and cat food customer tolling agreement, which had an impact of approximately $8.4 million or 1.4% in the first quarter, and is expected to total about $24 million for the full year.

Our Pet business was also impacted in the U.S. from soft demand in the pet specialty channel and some supply challenges out of our Latin American facilities after our rawhide product recall. However, we saw strong growth in our acquired business and were successful to replace some of our rawhide products with rawhide-free alternatives.

Sales in Home & Garden and Global Auto Care were slightly down in the quarter as retailers delayed the order intake and reduced their inventory in the low season.

Our e-commerce business from continuing operations was again a bright spot in Q1 with growth of more than 54% in our core U.S. market, driven by Pet and Hardware & Home Improvement. We continue to increase our investment into digital and social media marketing and add more resources to ensure that we are capturing the growing shift of consumer spending to online channels and influence their purchase decisions wherever they want to buy.

Our Q1 reported adjusted EBITDA improved by 0.5% year-over-year. Solid contributions from our PetMatrix and GloFish acquisitions and our continued cost improvement were offset by rising commodity cost and a negative currency impact on our input cost. We also faced some unfavorable price mix impact as Hardware & Home Improvement gained a major private-label contract and Global Auto Care had some strong promotions in the holiday season with appearance products while retailers delayed the intake of the seasonal A/C products.

Please let me remind you that Q1 is, for our continuing business, by far, our smallest quarter of the year, and that we generated in fiscal 2017 only 16% of our annual EBITDA in the first quarter.

Turning to Slide 7. We have made major progress in our key strategic initiatives. The U.S. footprint consolidation of our Auto Care division in Dayton, Ohio, is now complete, which is important as we head into the peak spring and summer period. Also the consolidation of our Hardware & Home Improvement distribution in Kansas is moving forward to a completion as we exited our West Coast distribution center in November and will exit our East Coast distribution center in February. Also our European project to consolidate our pet distribution center in our Coevorden facility will be completed early April.

While these projects have caused shipment delays and lowered efficiencies during the transition and startup phase, we will see the benefits of cost savings, lower working capital and improved service levels later this year and beyond.

We remain also focused on accelerating our organic growth. To support this objective, we announced on our last call the initiative called Project Alpha, where we make higher investment into new product development and digital marketing to launch more innovative products and expand into adjacent categories.

An early example is the organic expansion with Armor All into the adjacent automotive air freshener category. Our customers have responded in a very favorable way to our new portfolio, and we gained already many listings in all key channels. Another project is the expansion of our pets division with Nature's Miracle into more categories and channels as well as a major relaunch of IAMS and Eukanuba in Europe. In the first step, these initiatives require startup expenses, but we are excited about the additional growth opportunities.

The complementary initiative in the early stages of implementation is Project Ignite, which aims to redirect our resources and spending to our best growth opportunities. We expect Project Ignite to partly fund higher investments made through Project Alpha in fiscal 2018 as we will start to see the benefit in the second half of 2018.

Accordingly, we expect stronger performances in our continuing operations in the out quarters. We also have reaffirmed today our fiscal 2018 adjusted free cash flow guidance of a record $620 million to $640 million versus $587 million in fiscal 2017, which includes our discontinued GBA segment.

Turning to Slide 8. January was a month of transformational developments for spectrum brands. We announced a definitive agreement on January 16 to sell our Global Batteries and Lighting business to Energizer Holdings for $2 billion in cash in a transaction expected to close before the end of calendar 2018. This was a significant step in our announced strategy to reshape Spectrum Brands into a faster-growing, higher-margin and more focused consumer brands company. We are in the early stages of marketing our Personal Care and Small Appliance business as the other key component of our intention to divest our Global Batteries and Appliance segment in 2018, and we are in active discussions with interested parties.

We plan to use the net proceeds from these divestitures to reduce debt, repurchase shares, but also increase our investment in organic growth initiatives as well as bolt-on acquisitions in our remaining business of Hardware & Home Improvement, Global Auto Care, Pet, Home & Garden. By refocusing in this way, we believe we will strengthen our business and drive long-term growth and shareholder value.

Let me turn it over now to Doug for the financial review and details on our performance by product category.

Thanks, Andreas, and good morning, everyone. As Andreas noted, during the quarter, we decided to sell the GBA businesses and have therefore moved them into held-for-sale and discontinued operations classifications across the financial statements. This, along with the large onetime benefit driven by U.S. tax law changes, resulted in some meaningful differences in the presentation of our financial information this quarter. Also our continuing businesses are more seasonal in nature with relatively lower sales and EBITDA in the first half of our year and higher sales and EBITDA in the second half.

Now turning to Slide 10. Let's review Q1 results from continuing operations, beginning with net sales. First quarter reported net sales of $646.5 million increased 7.3% versus last year. Excluding the impact of $7.5 million of favorable FX and acquisition sales of $24.8 million, organic net sales grew 2%. This increase included the planned negative impact of the exit of the European pet food tolling agreement of approximately $8.4 million or 1.4%.

HHI delivered a record first quarter top line performance, partially driven by reducing the backlog associated with the continued ramp-up of the new Kansas distribution center.

Reported gross margin of 37.3% decreased 240 basis points from 39.7% last year, primarily due to unfavorable mix, input cost pressure, the negative impact of the pet rawhide recall and operating startup inefficiencies, primarily in HHI's U.S. distribution consolidation project.

Reported SG&A expense of $176.1 million or 27.2% of sales compared to $166.6 million or 27.7% of sales last year, primarily due to acquisitions and increased marketing investments to support new product launches. Reported operating margin of 5.3% decreased 490 basis points versus 10.2% in the prior year, largely driven by increases in marketing investments, distribution cost and restructuring charges.

On a reported basis, Q1 diluted EPS from continuing operations of $2.07 increased compared to $0.21 last year, primarily due to lower interest expense and a net income tax benefit in Q1 attributable to the recently enacted U.S. tax reform.

Adjusted EPS from continuing operations of $0.38 increased 8.6% versus $0.35 last year, primarily due to the change in the normalized effective tax rate to a blended annual rate of 24.5% from 35% last year, again, due to the changes in U.S. corporate tax law. And we will use this rate for the balance of the fiscal year.

Turning to Slide 11. Reported interest expense from continuing operations in the first quarter of fiscal 2018 of $38.6 million decreased $4.4 million from last year. Cash interest payments of $57.5 million were $13 million higher than last year, driven by the timing of payments on our euro-denominated notes.

Cash taxes of $10 million were comparable to 2017. And during the quarter, we recorded a net tax benefit of $127.9 million related to recently enacted U.S. tax law changes.

Depreciation, amortization and share-based compensation from continuing operations were $38.9 million, essentially flat to last year.

Cash payments for acquisition and integration and restructuring and related charges for Q1 were $7 million and $25 million, respectively; versus $4 million and $3 million, respectively, last year. Restructuring charge increases were primarily the result of the operating inefficiencies in the HHI distribution center consolidation project and the continuing impact of the U.S. pet rawhide recall initiated last June.

Now turning to business unit results from continuing operations, beginning with Slide 12 in Global Auto Care. Q1 reported net sales of $68.9 million decreased 0.9%. Excluding favorable FX of $0.6 million, organic net sales decreased 1.7%. International growth, especially in Europe, was more than offset by lower revenues -- lower U.S. revenues, driven primarily by the timing of refrigerant shipments.

Reported adjusted EBITDA decreased 25.3% to $14.8 million with a margin decline of 700 basis points to 21.5%, driven by lower volumes, unfavorable product mix and operating inefficiencies. And as a reminder, Q1 is typically about 15% or less of GAC's full year and not a meaningful indicator of performance for the balance of the year.

As Global Auto Care moves into its much larger spring and summer periods, its focus is on accelerating organic growth by share gains, adjacency expansions in the U.S. and an improved vitality rate with larger investments behind new product launches and faster international growth as we saw in Q1.

GAC expects further benefits from the second year of its Armor All Ultra Shine Wash and Wax Wipes, which was successfully launched in 2017; and the introduction of a full line of Armor All automotive air fresheners in the U.S. market. The full line includes clips and sticks, gel cans, fabric refreshener, paper cards and odor eliminator aerosols. This is one of our 2018 Project Alpha programs, and we're excited by its acceptance in the trade and its overall prospects.

Turning to operations. Global Auto Care has officially completed its new Dayton facility a little more than a year after it began consolidation of multiple U.S. manufacturing, distribution and R&D locations and comfortably in time for GAC's 2018 large spring and summer demand seasons. The Dayton facility is expected to deliver both cost savings and improve working capital as we move through fiscal 2018.

Turning to Slide 13. Hardware & Home Improvement recorded record Q1 net sales of $325.9 million, an increase of 12.8% versus last year. This solid performance was driven once again by strong growth in residential security and plumbing in the U.S. and Canada. Excluding favorable FX of $2.1 million, organic sales increased 12.1%.

Reported adjusted EBITDA growth was 1.4% to $60 million due to higher volumes, while margins fell 210 basis points to 18.4%. Impacting HHI profitability in the quarter were product mix, higher commodity costs and FX. Starting this quarter, HHI is pricing to help offset inflation.

Also impacting profitability in Q1 were costs associated with HHI's continuing work to complete its U.S. distribution center consolidation into a single, new and larger facility in Kansas. This project, which began in April of 2017, has experienced operating startup cost inefficiencies and a higher-than-normal customer backlog which is beginning to ease. HHI's West Coast DC was closed a few months ago and the East Coast facility is expected to be shut down this month. Once completed, the consolidation will result in a more streamlined footprint and lower inventory levels later in 2018 and beyond.

HHI's multiyear new product road map is delivering steady innovation, including a line of smart locks unveiled recently at the Consumer Electronics and International Builders' Shows, again confirming our innovation leadership in the rapidly growing U.S. residential smart lock market. HHI has also seen encouraging initial sales for its 2 Kwikset smart locks that are part of the Amazon Key secure in-home delivery system for Prime members.

Now to Global Pet, which is Slide 14. Global Pet continues its transition to a stronger-branded and higher-margin business in 2018. Q1 reported net sales of $202.4 million increased 4.2% as a result of $24.8 million of revenue from the PetMatrix and GloFish acquisitions completed last spring. Excluding acquisition revenues and favorable FX of $4.8 million, organic net sales decreased 11%. Negatively impacting revenues was a decline in European dog and cat food sales of $8.4 million or 4.3% from the planned exit of a customer tolling agreement.

Reported adjusted EBITDA increased 11.1% to $34.1 million due to the acquisitions, with a 100 basis point margin improvement. While organic adjusted EBITDA of $25 million declined 18.6%, excluding the impact from acquisitions of $8.7 million and favorable FX of $0.4 million.

Organic net sales decline both in the U.S. and Europe. And while e-commerce growth of 39% in Q1 was very strong in U.S., companion animal sales were adversely impacted by the rawhide dog chew recall as well as continued sluggish store traffic and continuing inventory adjustments in certain channels.

Pet top and bottom line results will continue to be boosted by the full year impact of the PetMatrix and GloFish acquisitions, which have both been fully integrated, are performing ahead of expectations and are margin-enhancing to the legacy Pet business. Pet is introducing innovation across grooming, health aides, rawhide chews and further expansion of our Nature's Miracle brand in the nonpet channels, which is also one of our Project Alpha initiatives this year.

In Europe, Pet is launching innovation under the IAMS and Eukanuba brands as well as for Tetra. And we now expect the full year impact of the exit of the European pet food customer tolling agreement to be approximately $24 million. And we believe that the pet recall impacts will lessen as the 3 affected South American plants return to full production levels.

Moving to Home & Garden, which is Slide 15. Home & Garden reported net sales of $49.3 million, fell 1%. Adjusted EBITDA of $5.4 million decreased 5.3% and reported margin of 11% fell 40 basis points, primarily due to reduced volumes in the division's seasonally smallest quarter, typically comprising about 10% of full year results.

The slightly lower sales were timing-related, and Home & Garden continues to plan for above-category growth in fiscal 2018, with quarterly phasing reverting to more traditional historic pacing, based upon normal spring and summer weather pattern expectations and driven by innovation in spraying, several new Hot Shot products and new Cutter backwoods high deet aerosol repellent.

Moving to the balance sheet in Slide 16. We ended the first quarter of fiscal 2018 in a strong liquidity position with more than $454 million available on our $700 million cash flow revolver, a cash balance of $138 million and debt outstanding of $4 billion. Capital expenditures, including discontinued operations, were $25 million compared to $28 million in the prior year.

Turning to Slide 17 and our 2018 guidance. We expect reported net sales from continuing operations to grow above category rates for most categories, including the anticipated modest positive impact from FX based on current rates.

We expect to deliver record adjusted free cash flow between $640 million (sic) [$620 million] and $640 million. And the following estimated ranges include discontinued operations. Full year interest expense is expected to be between $210 million and $220 million, including approximately $15 million in noncash items. Cash interest payments are expected to be between $185 million and $195 million. Depreciation and amortization is expected to be between $245 million and $255 million for 2018, including approximately 15 -- $50 million, 5-0, for amortization of stock-based compensation.

Our 2018 effective tax rate is expected to be between 25% and 30% prior to the impact of U.S. tax law changes and any sales of the GBA segment. And note that for adjusted earnings, we are now using a blended rate of 24.5% versus 35% in prior years. Cash taxes are expected to be between $60 million and $70 million without the impact of any dispositions. We do not anticipate being a significant U.S. federal cash taxpayer during fiscal 2018 as we continue to use net operating loss carryforwards.

Cash payments for acquisition and integration and restructuring and related charges are expected to be between $50 million and $70 million. And capital expenditures are expected to be between $110 million and $120 million.

Thank you. And now we'll turn it back to Dave for Q&A.

Thank you very much, Andreas and Doug. With that, operator, you may now begin the Q&A session, please.

(Operator Instructions) Your first question comes from Olivia Tong with BoA Merrill Lynch.

Wanted to concentrate first on sales. Excluding, obviously, the GBA business, what do you think your aggregate category growth rate is now? Because HHI looked great, but obviously, the other divisions were a bit light relative to our expectations. So first, was there any timing issue? Or is -- or what else could have impacted those results? And then on the margins, how do the margins of some of the recent new products that you launched compared to the existing lineup because particularly in HHI, that new smart lock sounds pretty innovative, but wondering how margins compare to the base.

Olivia, this is Andreas. Coming back first to your first question on the sales, the category growth. I think we continue to benefit from a kind of strong growth in the U.S. housing market, which will continue to drive, I would say, in a range of about 5% category growth for HHI. Of course, there will be differences. We are very strong in the electronic door segment, which is growing faster than that. So we believe that we can continue to grow that fast. Our strong growth in the quarter in HHI, which was above 10%, is partly driven by the fact that we have gained an additional private label customer, which, of course, did help us pull up our total sales number, but it had some negative impact on the price mix impact. Now moving on to the next business, which is not as seasonal, which is the Pet business. Here, again, we should see that there are different subcategories, some categories, like for instance, aquatics, are probably flattish. We know slightly down in some markets, slightly increasing. But also here, we are making good progress of growing faster than the categories because we are launching more equipment, getting new consumers into the hobby. So we are very active to try to promote fish ownership and get new entrants into the category. The second category in Pet is our companion, and there, we continue to see, I would say, solid single-digit or low single-digit category growth. We face here the headwinds, a, of our recall impact. While now all our factories are back up and running, it took them until about now, the early part of February, to be up to 100% of their capacity. So all the factories are now again back 100% at capacity. But it still takes us some time to fill up our supply chain, and therefore, we will still have some small impact in our second quarter from the rawhide recall. But then again, we should continue to see strong, solid growth as we recapture this space. Then if we move on to the next category, which is Home & Garden. Home & Garden, as Doug mentioned earlier, this is really now the low season. And this is coupled with the fact that all retailers, and this is really not only the Walmarts of the world, but all major retailers, are focusing on inventory reduction, especially during the holiday season, where they're giving more space to those seasonal products in the holiday time frame. So therefore, we don't expect that this slight decline which we had is any meaningful indication for the full year. We expect the category to grow, again, in the low-single-digit range. We had, last year, the negative impact that the trade was, yes, heavily stocked with insect repellents from the Zika scare in 2016, and then we see a normalization in 2018. So we expect, actually, a slightly above-the-category growth in Home & Garden. In Auto Care, also, we need to take a look at the different categories. In appearance products and also performance, we see slight single-digit growth. Again, this is driven basically from the increased awareness of consumers, so that should continue. Also A/C, we believe the market will grow in the low single digits because more consumers are becoming aware of this self-service solution. So we believe that's continuing to grow. We believe, again, we can grow faster than the category as we continue our international rollout, leveraging our international infrastructure to expand into more countries with those product portfolios. And we have seen already some first nice success in Europe in the quarter. And we believe that this is going to continue. The small push back in the first quarter on Auto Care was really, again, retailers reducing their inventory of the seasonal air conditioning product in the low season where, again, they wanted to create more space. So sorry for that lengthy reply, but I try to cover all the different categories. Now moving to your second question on the margins. Now I just need to look at my colleagues again. Can you help me again, what was your precise question again?

Yes. It was just basically understanding the margins, particularly, across the board, but particularly in HHI, given that you've got some pretty innovative new products. But given that the margins came down, what -- how do those margins compare to the base of the new products?

In HHI, really, the one part is, as I mentioned, this mix impact of this major private label, which we did win, although I have to flag that this is approaching the anniversary, so this is going to be pretty soon in our base numbers going forward. We had the second impact, which is also related to our consolidation of the Hardware & Home Improvement distribution in Kansas. As part of that project, we had not only inefficiencies, but also our service level had dropped a bit towards our customers, and therefore, we could not implement price increases in the first step. But we are now moving forward with price increases as our service level is back up, and therefore, we will pass on the higher commodity costs, which did hurt us in our first quarter, which did compress our margins in Hardware & Home Improvement. And that's going to be passed on to the market through the price increase which we are implementing now this quarter.

Perfect. And then just lastly, in terms of the pending deal with Energizer for Rayovac, I mean, what role do you guys play in getting the battery deal towards the finish line? There's obviously significant concentration in share, particularly in the U.S. I'm curious what you guys are saying and what you're doing behind the scenes there.

Well, first of all, we have certain obligations in the contract, how we cooperate to get the regulatory approval. Overall, we believe that there's a very high probability that we are going to receive approval. I think if you take a step back and look at the global battery market, there is a tendency across the globe, of increased private label. And again, me, as a German, I look at the German market. If you go from a volume basis, private labels approach 70% to 80% of the sold batteries. So therefore, I think looking only at the brand is a little bit misleading in the category. But again, we will work together with the Energizer law firms to gain the regulatory approvals. And we believe there's a very good probability of success.

Yes. And of course, Olivia, in the meantime, we'll continue to operate that battery business as we historically have.

Your next question comes from Bob Labick from CJS Securities.

Sorry if I missed this, but could you give us an update on the situation with HRG and the opportunity to collapse the entities? I know it's obviously been more public in December when you each had some 8-Ks and stuff, but can you tell us the latest on where we stand?

Yes, Bob, again, Andreas here. Also as you may know, we have formed a special committee of the independent directors, and they are in intense discussions with HRG. I think they are making good progress. But right now, there are no more details which we can share with you. But we will keep you posted immediately as soon as there are new events we can share.

Okay, great. And then regarding -- I know the timing is still by the end of the year, but the use of proceeds from the divestitures, you've mentioned bolt-on acquisitions. Does this mean you're ruling out other platform acquisitions? Or could you just talk about how you're thinking about the market out there in terms of M&A.

Yes, I think -- Bob, this is Doug. I think we will continue to think about capital allocation as we historically have. We want to put our balance sheet to the best use possible. And if that means building out and focusing on the remaining businesses, we'll do that as we continue to do that. And you saw that within the last year as we added on to the Pet companion animal part of our business and also with our GloFish acquisition. So there's a lot of opportunity for us to continue to do that. If there were another vertical that were interesting to us and fit nicely with us and had the right growth and cash flow expectations for us, we would certainly give that consideration as well. We're open for capital allocation business, but it -- we remain, as you know, very, very disciplined. So we have to find the right opportunities.

Okay, great. And while all this going on, are you precluded from buying back stock? I know that's part of the opportunity once things are concluded. Just currently, could you discuss that?

Well, we do not have a plan in place to buy stock. And obviously, to the extent that there are active discussions, active work going on that we know about that the world doesn't know about, we'd be precluded from being in the market.

Your next question comes from Faiza Alwy with Deutsche Bank.

So my first question is on free cash flow. So first of all, could you talk about what the cash flow would be, excluding the businesses that are in discontinued operations? Sort of what your outlook is for this year. And then secondly, it looks like you raised your outlook for cash payments on taxes and restructuring, but the overall cash flow outlook didn't change. So does that imply sort of an increase in organic EBITDA? And if so, sort of what's driving that increase?

So on the first question, no, I'm not going to break out separately our expectations for cash flow in the legacy business or continuing operations business versus the divested business, only because we don't know the timing of the divestitures. And as you know, our cash flow across the entire business is fairly seasonal. So to try to get into that kind of detail on predictive expectations isn't probably worth the effort now. You'll get some indication of what the businesses that are in discontinued operations, how they're performing when the 10-Q is filed. But there are also unusual allocation rules for interest expense and other things. So we're just going to commit to that guidance, recommit to that guidance that we gave earlier in the year. And you're right, we have spent a little more in -- or are expecting to have a little more cash flow hit from tax and from restructuring, with modest amounts, maybe $15 million for both of them in the year. And we'll manage that within the context of other working capital initiatives, with also other parts of our cash flow generation machine here. So it is not a specific indication of EBITDA performance changes from what our internal expectations are.

Okay. Okay, and then just following up on the HRG question, do you -- are you required to have an annual meeting in the month of February? Because I believe there are regulations as being part of a Delaware company, that you need to have an annual meeting in February. Could you confirm that?

Not in February. We have delayed that, and as we indicated in our release. And we will let the world know when the meeting will be scheduled.

Okay. Okay, and then just sorry, one last thing on Andreas maybe, if you could just talk a little bit more about the Pet business and sort of what your sort of long-term outlook for the Pet business is. Because it seems like the business has been pretty weak for the last several years. And just how are you thinking about it on a longer-term basis?

Actually, we believe that Pet is one of the divisions with the strongest growth opportunities. And I mentioned that earlier, that for instance, we are going to relaunch our IAMS and Eukanuba business brands now this summer. And actually, I'm joining the call from our Holland factory, Coevorden, where again, we just went through the entire program. When we acquired the business from P&G, all the NPD staffing, all those roles were actually at the corporate level and did not join Spectrum Brands. So we basically took over the business without new product development staff. And so we had to invest into those resources first. We had the negative impact of the mass exit. So therefore we -- but we are going to be now at this turning point. Another element of our strategy where we are really going to follow the same strategy as in batteries and where we were very successful is to load our factories with private labels. Because, again, having a high factory loading gives us lower cost per unit, which makes us longer-term competitive. And here, we have gained now the first 2 private label contracts in the dog and cat food business, which are going to materialize in this fiscal year. So we believe that our dog and cat food business, which we acquired 3 years ago, and which was really, year-over-year, a declining business, it has come to the point where it starts to grow. And therefore, we are extremely positive about that business. The second element is also that we were, and we still are, very strong in the pet specialty channel. There were certain products in our portfolio which were very strong, like Nature's Miracle. Strong brand awareness, but we did not utilize to the full extent those strong brands. So over the last 2 years, again, we have invested resources to upgrade the program, to expand into adjacencies, but also to prepare a wider portfolio that we can serve the different channels better with this strong brand. And also, as Doug mentioned earlier, we are actually taking this strong brand and going to expand, for instance, into the automotive channel, where we are going to offer Nature's Miracle to clean up the pet mess in the car. So therefore, we also believe that we have a very nice momentum in those categories. And the third element I mentioned earlier, in the aquatics category, there really, the market is in a slight decline or flattish. And here, we have started to invest since 2 years to create new demand, getting children, new consumers into the hobby. And also here, we are seeing first, nice success here in Europe, where we are gaining new customers, new listings. And that is also on a positive trend. So therefore, we firmly believe that Pet is going to be one of our strongest-growing categories going forward.

Your next question comes from Kevin Grundy with Jefferies.

I wanted to pick up again on the margin piece, obviously, a lot of pressure across your segments in the quarter. Doug, can you help us understand a bit, I guess, how much of this is specific to the quarter versus how much you'll have to contend with? And it would seem like commodities will -- that will continue to be a headwind, perhaps mix continues to be a headwind. Maybe you can talk about some of the major areas, commodities, pricing, mix, productivity savings and how we should think about that. And then, Andreas, sort of within that, the topic of pricing is of great interest now in the space. And in certain categories, it's become very difficult to take pricing and maybe less so elsewhere. And you sounded pretty optimistic on your ability to take pricing in some of your categories. It would be great to get an update there on how those conversations are going with retailers at this point, your confidence in your ability to take pricing and how much of that is included in your guidance for the year. And then I have a follow-up.

Of course, you have a follow-up after all of that, Kevin, good. Let me take a couple of those off. So we do have broad-based commodity pressure this year that we haven't seen in a number of years. And you're aware of that, it's everywhere. For us, specifically, it's a little bit in zinc in our HHI business and some other input costs into that business. Distribution across our portfolio is a little bit of incremental pressure this year. From a mix perspective, I think Andreas explained that a little bit. We have a couple of things happening in our portfolio. In Home & Garden and Global Auto Care in first quarter, there's little opportunity to leverage anything there because it's such a small part of their year, 15% in the case of Global Auto Care and 10% in the case of Home & Garden. And so I'm not concerned about leveraging our base cost. And then in HHI, as Andreas also mentioned, we are in the process of -- in the first year of rolling out a pretty significant private-label win that is having a bit of a mixed impact. The -- from a reported basis, the DC and pet recalls are a bit of a drag in HHI, and also to a lesser degree in Global Auto Care in the quarter. And then the recall, of course, in Pet. Now that's reported. So overall, there is some mix impacting us in the quarter. And we expect to do -- have improved margin across the business, of course, the continuing business going forward. Productivity, as you know, we are very focused on productivity as a company. It's a core attribute, it's a core -- it's in the core DNA of our businesses, and our businesses are driving that day in and day out. So we do expect to be able to offset at least some of these input cost pressures with productivity. And with that, I'll pass it back to Andreas for your question on him on pricing, which would be the other element we're using to balance them up.

Yes. Again, I think a little bit simplified. The pricing topic is really decisive. If it becomes a win/lose discussion, where if we want to take price, the retailer margin goes down, I fully agree with you, it's a no-go. So therefore, we will not be successful with that. So therefore, what our key approach is, that we are trying to make it a win-win, where again, we pass a price increase to the retailer and the price -- the retailer can take their consumer prices up. So that at the end of the day, we pass on the inflation coming from commodities on to the consumer. What we typically also try to combine with price increases are new product launches, product upgrades, be it in packaging modifications, where we have either combined packages. So therefore, we are trying to do that in a kind of very intelligent way, where it is becoming a win-win for our retail partners and us. And second also, where for even for the consumer, he's getting, at the end of the day, also a better product for the deal.

So how much? Did I miss that? How much pricing is included in the outlook for the year? Is it modest? Is it -- are you able to take pricing across much of your portfolio?

We will, I would say, 100% is absolutely unrealistic because as I mentioned before, sometimes, it depends on how is the competitive set? How is the presence of private labels which may limit the increase of consumer prices? But I would say we will probably have half year impact on half of the portfolio. So we should see in about kind of 4-quarter -- a full year impact in price impact.

Okay. That's helpful. And the follow-up, Andreas, is just -- it's a question on the battery business, but asking it a bit differently. And that is managing the execution risk with that business, particularly around key personnel and those that are customer-facing and the morale in that business. And I ask that in the context of the regulatory risk. You guys are confident/hopeful the deal goes through, and obviously, so is Energizer, but it's possible that it doesn't. And in the event that it doesn't, it is also plausible that you're not going to get the kind of multiple that Energizer is willing to pay, in which case, you keep the business. With that sort of hypothetical construct, can you talk a little bit how you're managing the execution risk around that business?

We continue to run the business as if we own it. And therefore in this, we are launching great innovation. The best example is we are just in the middle of launching a new generation of hearing aid batteries which is the best-performing hearing aid battery on the market. We are investing into new packaging facility. That means we continue to invest in the business. I mentioned earlier I'm here right now in Europe. We had, yesterday, our European business review for batteries. We continue to win new customers. We are growing year-over-year in Europe with our battery business. So very nice momentum. The one point where, again, to come back to your question on morale, where we again explain very openly to our team is that Varta joined back in 2002, Rayovac, I joined the Spectrum Brands in 2002 as part of an acquisition. And the Varta battery business probably would not exist any longer if we would not have merged together with the Rayovac to become a bigger, stronger global player. And therefore, we believe that also in the long term, it is going to strengthen the battery portfolio. And by combining Energizer and Rayovac/Varta's strengths, so therefore, we believe it's long-term beneficial also for the employees of the Spectrum Brands battery business.

Your next question comes from Jason Gere with KeyBanc Capital Market.

Jason, are you there?

Sorry guys, I apologize. I was a little late on the call, just busy earnings day. Did you guys talk about the planogram resets in the continuing ops in terms of the discussions you're getting? Any kind of shelf space changes? Just in a world of destocking that, it seems to impact everybody from quarter-to-quarter. Just wondering if you could talk a little bit about that. And then conversely, just the e-commerce business, the great growth that you got. Where do you -- what businesses are you -- still, do you think, are underpenetrated? Do you think there's more room to go? And if you can maybe kind of flesh out that as well.

Yes. This is Andreas again. Let me first cover your question on the planogram. You are correct that there is a tendency in a lot of retailers for simplicity, getting a kind of cleaner shelf with fewer offerings. But we firmly believe, at the end of the day, it's decisive how much percent of the shelf we have. So therefore, we do have, in some categories, really the one or other SKU where we are losing a facing, but in percent of the shelf space, we continue to win, be it in Pet, be it in Auto Care, where we are seeing this tendency coming up quite strong. So therefore, yes, there is a kind of tendency for a clean shelf initiative. But so far, we are not seeing that as a major headwind for us. Now the second question on the e-commerce. Of course, if you look at the different categories, there are categories like Pet and Hardware & Home Improvement, where the online share of business sold is higher than in other categories as Auto Care. We are investing in all our business into more staff, into more digital marketing to drive it because we see that as a trend in the consumer behaving, that they search for information. And wherever they want to buy it, but then also, very often, they buy it online. So we have added, for instance, in Auto Care, when we acquired the business a couple of years ago, they had 0 dedicated people focusing on e-commerce. We have now, in the meantime, a dedicated team focusing on it. So we expect that we can continue to grow in all of our businesses.

Okay, great. And I'm going to test my luck a little bit here. I know you didn't give any color on the free cash flow, but I was just wondering if, just some help from a modeling perspective, Doug, if we can think -- and I appreciate getting the first quarter of the restated. But if we think about what percent the GBA business accounted for of EPS last year, can you just give us like a ballpark range? So to make sure that our continuing ops numbers, because that's how we're going to be kind of modeling going forward, is within the right range.

I'll give you this much, and hopefully, it will be helpful, Jason. Our -- you can tell what our EBITDA was from the GBA business in '17. And you also -- the only other thing I would add for you that's maybe helpful is that, that business is probably slightly above our 2% CapEx target, with the battery business being a little heavier and appliance business being a little lower.

No more? That's it?

That's it. $620 million to $640 million, that's our number.

Your next question comes from Sam Reid with Wells Fargo.

I had a quick question on Project Alpha specifically. Some of the investment spending that you guys earmarked last quarter for that initiative, just curious as to how much of that was directed to Global Batteries & Appliances. And are you still looking to kind of make the same level of investment you guys talked to last quarter? Or have you modified your investment plans, given some of the changes in your business?

Actually, in the first quarter, we did significant Alpha investment into batteries and appliances. If I just may refer, for instance, we launched Russell Hobbs in the U.S., in the Home Appliance business, was a very successful launch. Actually, we exceeded our sales expectations. So we will continue to execute those project. The 1 project, for instance, is developing a completely new product lineup which is going to hit the market in 2019. So therefore, we will continue to drive forward such initiatives, even if it may be beneficial for the future owner of the business. So we will continue that. And also in our remaining business, we will continue to execute all those Project Alphas.

Got you. And then one follow-up question. I guess, could you kind of help us -- help sort of reframe your longer-term EBITDA margin expectations? I know you guys have historically indicated that you expect EBITDA margin expansion across your business. But curious how that changes now that the Global Batteries & Appliances business is no longer a part of your core mix.

Sure, Sam, this is Doug. It doesn't really change. Because as you'll recall, we've given an expectation of expanding EBITDA margins every year in the 20 to 40 or 20 to 50 basis point range. And we've also said that to the extent that we are able to overdeliver that, then we are more likely than not to reinvest that overdelivery into further growth in the business. So that range actually is kind of a governor for us going forward. So that would continue to be our long-term expectation.

Your next question comes from Joe Altobello with Raymond James.

First is I want to go back quickly to cash flow for a second. What's the expected impact from changes in working capital on your cash flow target for this year?

Joe, you've been talking to Jason. So we don't go into that level of detail. And I don't expect I will on this call, either. Obviously, as you've seen from us in the last couple of years, we have kicked off a number of working capital initiatives. And we made a lot of progress in accounts payable and a lot of progress in some parts of our businesses in inventory. Where we're lagging a little bit in inventory right now isn't because we're not investing in the initiatives that will improve inventory performance, but it's the transitions associated with the Global Auto Care and HHI DC consolidations. And so you'll see inventory a little high today, but those businesses through the rest of the year, we expect to bleed that down and then really realize some additional working capital benefits either at the very end of our year or into early 2019.

Okay. Because that's where I was trying to go with this, it's how much is left in the tank, I guess, with regard to working capital improvements. And it sounds like there is a lot.

We're never satisfied. It's a lot like productivity for us. We're never satisfied.

Okay, great. And then secondly, with the sale of batteries, one of the things that's, I guess, attractive about the battery business is it's got a ton of distribution. And I think you guys have really done a good job of piggybacking that infrastructure as you went to new markets. Does the sale of that battery business make that a little bit harder to expand into new markets with your existing portfolio?

Yes, this is Andreas. You're 100% correct. The battery and also the appliance business have been somehow the base of our international platform. However, if you do an a-b-c analysis of those international markets, you will see that you can cover more than 90% of the European business, more than, yes, close to 95% of the Latin American offers with a significantly reduced footprint in those continents. And this is exactly what we are developing right now, together with the regional teams, of developing this kind of footprint, where we will still be able to deliver in all key markets, all key retailers direct. And then for smaller markets, we will work on concepts where we might have to look for distribution partners to continue to serve them. So yes, you're right, there is an impact. But we believe that the impact is going to be relatively moderate because, again, we will continue to be present in all major countries.

Okay, great. Just one last one, if I could, on EBITDA margin. Obviously, a little bit lighter than we thought this quarter. Given the exclusion of GBA, how do we think about your evergreen target for fiscal '18 with regard to 20 to 50 basis points of margin expansion? Obviously, you've got some headwinds with commodities and other things. But would you expect to finish the year at least close to that?

Yes, we don't guide, as you know, Joe, on the EBITDA margin. But that is our long-term ambition. And we are going to -- our expectation is we'll do that year in and year out.

Okay, operator. I think we have time for one more question in the queue.

Your next question comes from Ian Zaffino with Oppenheimer.

A couple of questions. On the battery sale, what's your anticipated proceeds? Or what do you expect to get, I think, like, in the bank?

Yes, we haven't disclosed that in part because of timing. We don't know exactly when the transaction will close. And we, because of the new tax law, we're actually a fiscal year end in September as you know. So we have a blended rate of 24.5%, and which is 1 quarter at the old rate, 3 quarters at the new rate. And so it actually makes a difference whether we close it this year or in our next fiscal year. And there are a number of other factors that impact that, including allocated price around the world. So we're not ready, prepared at the moment to give an indication of what we expect net proceeds to be.

And is there a way that you could use NOLs or anything to offset some of those tax implications?

Sure. As you know, we have NOLs at Spectrum Brands remaining. We expect to use those one way or the other though, so there's not a huge present value benefit to that. There's certainly a cash benefit.

Okay. So I guess we should be operating under the framework of a 25% tax rate on that $2 billion.

No, I didn't say that, but I'll leave you to your assumptions.

Okay. And then just more of a nuance question is free cash flow guidance, you maintained, but then there were a couple of changes in the guidance of restructuring, there are a couple of other charges that you've changed since the last time you issued guidance. And that would imply an EBITDA guidance increase. Is that actually the case? Or is it just kind of some noise in there, and the way to think about EBITDA or EBITDA guidance or implied EBITDA guidance is unchanged?

Right. So we're not -- as you know, we don't guide on EBITDA. And I would say that our -- those adjustments are a little bit of noise in the system, a little bit of tweaking to what our expectations are for those couple of line items for the year. And we will probably lean into other working capital initiatives a little harder.

Okay. So meaning that as you lean into the working capital, you'll see better-than-expected free cash flow? Or that would maybe to offset some EBITDA that may...

No, I would say that it would -- not to change our guidance around free cash flow, but that was -- and it's to deliver within that range, given that we've taken tax cash up a little bit and we've taken restructuring cash up some, I would look to other parts of the balance sheet to drive initiatives further in.

Thank you. With that, we have reached the top of the hour, so we'll proceed to conclude our conference call.

I certainly want to thank both Andreas and Doug. And from all of us here at Spectrum Brands, we thank you for participating in our Fiscal 2018 First Quarter Earnings Call. Have a good day. Thank you.

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