Spectrum Brands Holdings Inc (SPB) 2018 Q2 法說會逐字稿

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2018 Second Quarter Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, April 26. Thank you.

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

Thank you, operator, and welcome to Spectrum Brands Holdings Fiscal 2018 Second 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 today's call.

To help you follow our comments, we have placed a slide presentation on the event calendar page in the IR 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 will see that our call will be led today by David Maura, our Executive Chairman and Chief Executive Officer; and Doug Martin, our Chief Financial Officer. David and Doug will deliver opening remarks and then conduct a Q&A session.

If we turn now to Slide 3 and then Slide 4. Our comments today 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 April 26, 2018, and 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 on 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 IR section.

I will now turn the call over to our Executive Chairman and Chief Executive Officer, David Maura.

Okay. Thanks, Dave, and thanks, everybody, for joining us this morning. On behalf of the Board of Directors, I'm here today with a pretty clear message. The recent inconsistent performance of our company, capped off by the disappointing second quarter results, must and will come to an end. We intend to deliver the growth and long-term shareholder value you are expecting from us and that we are more than capable of delivering.

This company will in no way be defined by this quarter's results. 12 months from now, this quarter will be insignificant. But this company will be refined by the actions that I've taken over the last couple of weeks, actions taken today and over the coming months.

Spectrum Brands is going through a transformational year that will result in a much less levered entity with 4 core operating units. We will have greater growth potential and higher margin structures going forward.

We have announced several actions this morning, including the establishment of a new, more efficient operating structure for our Pet, Home & Garden and Auto Care divisions, and a new board authorization for a 3-year $1 billion share repurchase program.

The challenges, which you see in the numbers this morning, relate to our HHI and GAC consolidation projects. They were meaningfully greater than management anticipated or expected, and that resulted in a short-term degradation of sales, margin and free cash flow. We've taken swift and decisive action in recent weeks to steady the HHI and Global Auto Care facilities with new front-line management, along with improved plans and aggressive oversight.

I am confident that the longer-term strategic merits of these consolidations will result in improved operating efficiency, reduced costs and much lower inventories.

If I could have you turn to Slide 7 now. We are combining the leadership of our Pet, Home & Garden and Auto Care divisions into a newly formed consumer products group. This group will be run by Randy Lewis. Randy brings strong, fresh leadership to this group, and he will drive efficiency to better leverage the shared manufacturing and distribution expertise across these businesses.

Let me give you an example. The industrial production of our aerosol products, liquid fills and our canister wipe lines in both Home & Garden and Auto Care are essentially identical. This will allow us to expand and further leverage our centers of excellence and best practices between both our St. Louis facility, which is run like a military operation, and our new Dayton facility, which needs discipline. Randy is a seasoned and highly capable operating leader, and he's now going to oversee the corrective actions being taken to implement -- and being implemented in our new Auto Care facility in Dayton, Ohio.

While this will take time to achieve full efficiency levels at this facility, I have every confidence that Randy and his team will accomplish the task.

Before I turn this over to Doug for some details on the quarter, I want to be clear: This quarter and our resulting of the lowering of our 2018 guidance are major disappointments to every one of us at Spectrum Brands, but they will in no way define this company a year from now. We have a lot to be excited about. There are major proceeds coming into this company from our GBA asset sales, and there are major benefits with the resolution of the HRG ownership structure, which was resolved in the merger that we expect to close in June. We are on the way to building a smarter, stronger and much more focused Spectrum Brands for the future.

I'm confident that you will see positive momentum and growth restored in the back half of this year. I will come back to you during Q&A. But now I'll turn it over to Doug for more details.

Thanks, David, and good morning, everyone.

Turning now to Slide 9. Internal operating challenges and external headwinds combined to weigh heavily on our top line and margins this quarter. We expect the second half of the fiscal year to produce greater adjusted EBITDA from continuing operations. However, the magnitude of our Q2 -- our late Q2 shortfall and manufacturing and DC startup inefficiencies have caused us to revise downward our guidance for the full year adjusted EBITDA from continuing operations at the midpoint by $57 million and adjusted free cash flow on a total company basis by $135 million.

Turning to Slide 10, net sales from continuing operations. Reported net sales growth of 1.3% was driven by our 2 Pet acquisitions last spring. Excluding $25 million of Pet acquisition sales and $12.3 million of favorable currency, organic -- Q2 organic net sales fell 3.7%. And there are several discrete items to consider when evaluating the organic decline.

First, about $21 million of HHI customer orders and $9 million of Global Auto Care customer orders, or about $30 million in total, were in-house but not shipped before quarter-end due to higher order backlogs that developed in March as we worked to complete the HHI and GAC facility consolidations and return to normal operating efficiency levels. We expect to ship most of these orders in Q3 and complete the return to normal operating rhythms by the end of this fiscal year.

Second, and needless to remind those of you in the Northeast, February and especially March were unusually cold and wet months across much of the U.S., which adversely affected the planned timing of our Home & Garden revenues. Customer POS declined significantly in the quarter versus prior year, with retailers delaying and/or reducing pre-season orders. We estimate this Q2 impact at nearly $10 million. This also created unfavorable mix as certain major private-label load-in orders shipped in the quarter whereas branded orders were delayed due to the weather.

However, with most of the traditional season still ahead, we expect Home & Garden to continue to build on its multi-year share gain performance in the balance of the year.

Third, in Pet, sales were reduced as expected from the continuing planned exit of the European dog and cat food customer tolling agreement, which had a Q2 impact of about $7 million or 0.9% and is still expected to total about $24 million on the year. Pet U.S. sales also continue to be impacted by a lost rawhide distribution of about $5 million in Q2 from last June's recall that we have not yet lapped or have been fully able gain back. The combined impact in Q2 from these items totaled about $12 million.

U.S. sales also continue to be impacted from sluggishness in Pet specialty channels.

Turning to Slide 11. Our decline in adjusted EBITDA and EBITDA margins were more pronounced than our overall revenue shortfall. The biggest drivers were the major manufacturing and distribution center operations inefficiencies from HHI and Global Auto Care, which materially hampered our distribution capabilities in March, and also unfavorable product mix across the businesses.

Broad-based rising commodity input costs and higher U.S freight costs also contributed to the decline. We believe the HHI and GAC operating inefficiencies are transitory in nature and are -- and the adverse margin impact is largely behind us.

In the short term, however, we are unable to offset these headwinds. We do not believe Q2 margins are representative of underlying margins of each business over the longer term.

But given these first half challenges, we do expect -- we do not expect to realize our annual 20 to 40 basis point margin expansion ambition this year.

Looking to the second half, we are optimistic about delivering an increase -- a significant increase in net sales and adjusted EBITDA versus the first half with more than 70% of the Home & Garden and Global Auto Care seasons ahead.

Given the recent actions to improve operational efficiency that David mentioned, we are confident that customer order backlogs at HHI and Global Auto Care will continue to come down as the facilities improve their on-time shipments, which we expect will create a tailwind for these businesses during the more peak demand times of their year.

In Pet, the operational impacts of the rawhide recall last June are essentially behind us, and the 3 South American rawhide plants affected are now back to operating at pre-recall capacity levels as we work to further strengthen our leadership position in this growing U.S. dog chews category.

Turning to Slide 12 and our guidance update. Due to the significant EBITDA miss in late Q2 and despite the sequential improvement expected in the second half, we have lowered our 2018 adjusted EBITDA guidance for continuing operations to a range of $600 million to $617 million and are reiterating 2018 adjusted EBITDA guidance for discontinued operations of $300 million to $310 million.

The adjusted EBITDA decrease from continuing operations, coupled with higher cash restructuring and acquisition costs, largely driven by the GAC and HHI consolidation projects, increased cash interest payments primarily related to borrowings to fund our recent $250 million share repurchase, and higher than planned year-end inventory expectations have caused us to lower our 2018 adjusted free cash flow expectations to $485 million to $505 million.

Now a quick update on our corporate actions. On March 29, we jointly announced with Energizer that the Federal Trade Commission allowed the expiration of the 30-day Hart-Scott-Rodino waiting period, which in effect provides U.S. regulatory approval of the sale of our Global Battery and Lighting business to Energizer for $2 billion in cash proceeds. We are proceeding with a handful of required international regulatory approvals and continue to expect the transaction to close during the second half of calendar 2018.

In addition, we will remain in active discussions with interested parties on the appliances sale process.

Finally, we're on track to complete the merger with a majority shareholder of HRG Group, which we estimate will be around the end of June. We are now in the review process with the SEC after our preliminary prospectus and proxy statement for the merger was filed on April 10. The merger requires the approval of a majority of shareholders of both Spectrum Brands and HRG Group, and we do not anticipate needing (inaudible) approvals in connection with the transaction.

Now turning to Slide 13. Let's review additional Q2 results from continuing operations. Reported gross margin of 35% decreased 560 basis points from 40.6% last year, primarily due to the operating startup inefficiencies in the HHI and GAC facility consolidation projects, along with input cost increases, weather-driven unfavorable mix and the negative impact of the Pet U.S. rawhide safety recall.

Reported SG&A expense of $193.3 million or 25.2% of sales compared to $187.7 million or 24.8% of sales last year, primarily due to acquisitions, increased marketing investments to support new products, including Project Alpha investments, and costs associated with the HRG Group merger.

Reported operating margin of 5.6% decreased 830 basis points versus 13.9% in the prior year, largely driven by unfavorable mix and increased marketing investments, distribution costs, HRG Group transaction costs and restructuring charges.

On a reported basis, Q2 diluted EPS from continuing operations of $0.02 decreased compared to $0.68 last year, primarily due to higher production costs and higher operating expenses from incremental HRG Group merger transaction costs and restructuring. Adjusted EPS from continuing operations of $0.56 decreased 34.9% versus $0.86 last year, primarily due to lower gross profit and higher interest expense.

We are using a 24.5% blended annual tax rate for fiscal 2018 versus a 35% rate in prior years due to changes in U.S. corporate tax law.

Turning to Slide 14. Reported interest expense from continuing operations in the second quarter of fiscal 2018 of $42.1 million increased $3.3 million from $38.8 million in the prior year. Cash interest payments of $46.4 million were $6.2 million lower than last year, driven by timing of payments on our euro-denominated notes. Cash taxes of $14.8 million increased compared to $8.6 million in 2017 due to the timing of the payments and refunds worldwide.

Depreciation, amortization and share-based compensation from continuing operations of $30.7 million decreased from $43.4 million last year due to lower expected equity incentive compensation.

Cash payments for acquisition and integration and restructuring and related charges for Q2 were $12.6 million and $25.1 million, respectively, versus $4 million and $7.5 million in the prior year. Restructuring charge increases were primarily the result of operating inefficiencies in the HHI DC consolidation project, higher merger and acquisition cash costs related to our battery and appliance divestiture processes.

Now to our business unit results from continuing operations beginning with Slide 15 in Global Auto Care. Q2 reported net sales of $118.3 million decreased to 0.6%. Excluding favorable FX of $1.3 million, organic net sales decreased 1.7%. Higher U.S. appearance product revenues were offset by lower performance product and refrigerant sales. Approximately $9 million of in-house orders were unable to be shipped at the end of March due to higher backlogs that developed during work to complete the Dayton facility consolidation project.

Reported adjusted EBITDA decreased to $19.8 million with a margin decline to 16.7%, driven principally by major operating inefficiencies related to the Dayton facility startup, which became more apparent as we ramped up seasonal production and distribution in March. Lower volumes, unfavorable product mix, higher refrigerant and other input costs also contributed to the decline.

GAC is benefiting from the second year of its Armor All Ultra Shine Wash and Wax Wipes, which were successfully launched in 2017, and we've added 2 new exterior wipes this year, headlight restoration and wheel cleaning. The introduction of a full line of Armor All automotive air fresheners in the U.S. market has also been well accepted, and we're pleased with the overall prospects, including more innovation in 2019.

Turning to Slide 16. Hardware & Home Improvement reported Q2 net sales of $318.5 million, which increased 1.5% due to continued strong demand, largely offset by distribution constraints and temporarily higher backlogs related to the U.S. distribution consolidation project. Excluding favorable FX of $2.5 million, organic sales grew 0.7%. The large sequential top line growth decline from 12% in Q1 to 1.5% in Q2 was driven by temporarily higher customer order backlogs following the closure of our East Coast DC in late February.

Reported adjusted EBITDA of $45.5 million fell 19.6% with a margin decline of 370 basis points. The profitability in the quarter was principally impacted by costs associated with work to complete HHI's distribution center consolidation and unfavorable product mix as well as higher commodity costs for zinc, copper and steel. Once completed, the Kansas consolidation will result in a more streamlined footprint with significantly lower inventory levels.

Now to Global Pet, which is Slide 17. Global Pet continues its transition to a stronger branded and higher-margin business in 2018 to position it for sustained longer-term growth. Q2 reported net sales of $211.2 million grew 10.1%, driven by $25.2 million of acquisition-related sales. Excluding acquisition revenues and favorable FX of $8.5 million, organic net sales decreased 7.5%.

Negatively impacting revenues was a decline in European dog and cat food sales of $7.1 million or 3.7% from the planned exit of a customer tolling agreement, as well as lost rawhide distribution of about $5 million or 2.6% from last June's rawhide recall that we'll lap soon.

Reported adjusted EBITDA increased 11.9% to $35.7 million due to the acquisitions, with a 30 basis point reported margin improvement. U.S. companion animal sales were adversely impacted by the rawhide dog chew product recall as well as continued sluggish pet specialty channel traffic. Pet results will continue to be boosted by the full year impact of PetMatrix and GloFish, which are both performing ahead of expectations and are margin enhancing to the legacy business.

Pet is introducing innovation across grooming, health aides, rawhide chews and further expansion of Nature's Miracle into non-Pet channels, which is also one of our Project Alpha initiatives this year.

We continue to expect the full year impact of the exit of the European pet food customer tolling agreement to be approximately $24 million, and we believe the Pet recall impacts will lessen as the 3 affected South American plants have now returned to pre-recall production levels.

Moving to Home & Garden, which is Slide 18. Home & Garden reported net sales of $118.1 million fell 10.5%. Adjusted EBITDA of $25.3 million decreased 28.9% and reported margin of 21.4% fell 560 basis points. Lower second quarter net sales were driven primarily by significantly reduced POS and resulting retailer order and promotional delays due to unfavorable weather in March, slightly offset by growth in Latin America. More than 70% of POS in the U.S. remains in the third and fourth quarters of fiscal 2018, traditionally the strongest part of the season.

Overall, we believe the unfavorable weather impacted Q2 sales by about $10 million.

Moving on to the balance sheet and Slide 19. We ended the second quarter with ample liquidity, including $210 million available on our $800 million cash flow revolver, a cash balance of $135 million and debt outstanding of $4.5 billion.

Our peak working capital borrowing season is now behind us, and we expect to pay down the revolver through the fiscal year-end.

Capital expenditures, including discontinued operations, of $23.4 million were comparable to $23.1 million in the prior year.

Turning to Slide 20 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 impacts from FX based on current rates.

As discussed earlier, we have lowered our expectations for adjusted free cash flow to be between $485 million and $505 million. The following estimated ranges include discontinued operations.

Full year interest expense is now expected to be between $215 million and $225 million, including approximately $10 million of noncash items. Cash interest payments are expected to be between $200 million and $210 million.

Depreciation and amortization is now expected to be between $205 million and $215 million for 2018, including approximately $10 million for amortization of stock-based compensation.

Our 2018 effective tax rate is expected to be between 27% and 32%, excluding the large onetime items from Q1 related to the impact of the U.S. tax law changes and any sales of the GBA segment. And note that for adjusted earnings, we now use a blended rate of 24.5% versus 35% in prior years.

Cash taxes are expected to be approximately $60 million to $70 million without the impact of any dispositions. We do not anticipate being a significant U.S. federal cash taxpayer during 2018 as we continue to use net operating loss carryforwards.

Cash payments for acquisition and integration and restructuring and related charges are now expected to be between $80 million and $90 million, and capital expenditures are expected to be between $110 million and $120 million.

Thank you. And now back to Dave for a few closing comments.

Thanks, Doug.

As I conclude today's call, I want to be clear: I absolutely believe that 1 year from now, Spectrum Brands will be in its best position ever since my tenure with the company. I've been here almost 10 years.

We will significantly strengthen our balance sheet from over $500 million plus of free cash that we expect to collect over the next 5 months. We have meaningful proceeds coming in from asset sales.

We will restore efficiencies in our factories, and customer service will be meaningfully enhanced as a result. Customer service is job 1 in Dayton and in Kansas.

Our company is intact. The underlying demand for our products is healthy. Our order book is strong, and the executional issues will be behind us. I still believe the best days for Spectrum Brands are yet ahead.

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

(Operator Instructions) Your first question comes from Ian Zaffino with Oppenheimer.

David, as far as the CEO role, is this a permanent role, or is this temporary until you find someone else?

I'm permanent. I'm looking forward to tackling these challenges because I see them as opportunities, and I'm excited to drive the business forward.

And I know you mentioned customer service. Give us an idea of what your customers are saying to you. You've had these issues for over a year now. Is there any kind of degradation in those -- in that customer relationships, or is this just something you're going to be able to quickly recover?

No. It shows up in the free cash flow adjusted guidance, and that's why it's so transitory. The bulk of the adjustment today is 100% -- it's almost 100% working capital and basically investment in customer relations. And so we're doing all that to support them through this time. And I -- listen, I'd be remiss if I didn't thank my sales force at both HHI and Global Auto Care for doing a great job of managing our retail customer. But look, I also want to tell you, while today is technically day 1 on the job for me, I've been traveling and probably haven't slept for 2 weeks, but we were fortunate enough to have Randy Lewis a little over a month ago offer up a gentleman by the name of Steve Keller, and he's one of our best operators and we dropped him into Dayton. He's now taken over running that plant. He's already cleared some of the bottlenecks in distribution that are out in front of those production lines, and we're getting our fill rates back up. So look, it's -- what's difficult for you, the reader today, to absorb is the magnitude of it. And really, it's the simple fact is everything and anything that could have gone wrong in the month of March went wrong. And calling it kind of a perfect storm in that month of March is -- I mean, you live in the Northeast like me, there's just wasn't a lot of people going around walking dogs in snowstorms in New Jersey or spraying for weeds. But look, customer service is job 1. We're investing heavily behind it. We have phenomenal brands, phenomenal franchises. We're going to keep our sales base, and we're going to make sure -- look, I told the team if there's any customer I need to see to get them through this process, we're going to do that. But absolutely, we did not anticipate the disruption we experienced in March, and we're putting it behind us.

Okay. And Doug, I know you gave us a good idea of what the revenue impact was on the distribution centers. What was the EBITDA impact? So was there additional costs above and beyond that? So just trying to bridge the gap between where we were on the street versus kind of where you came in as it relates to EBITDA rather than revenues.

Yes, we haven't broken that out, wouldn't go into those level of details. But aside from some of the things David mentioned, the investments in customers that really haven't hit our EBITDA but are more in working capital or in some of the restructuring charges. We have had inefficiencies in those 2 facilities, too. And you'll see that in our gross margin.

Okay. And then just final question would be on the buyback. I guess you have $200 million plus on the revolver, over $100 million of cash. Are you going to be aggressive defending the stock or is this just something that you're going to just pay down debt and then wait for the proceeds of Energizer to come in -- or from Energizer to come in?

I have 2 big focuses. One is we are going to drive efficiencies in these plants and restore customer service. We need to get our act together. We need to start putting up numbers and delivering sales and EBITDA growth and restore the free cash flow of this company, that's job 1, and that's happening. Job 2, I want to materially delever this company's balance sheet. We will collect over $500 million of cash in the next 5 months. I think it'll be significantly more, but let's start under-promising and over-delivering again. You see $2 billion of revenue we've cleared in the U.S. We've got a couple of clearances yet over in Europe. I want to thank Energizer. Honestly, they've been a phenomenal partner with us. They're working tirelessly around the clock on the carve-outs, both from the legal and the financial side. This transaction has a very high probability to close. So if you just tally that up, that's quite a lot of cash coming into the company. And if you apply that to my debt structure and you look at the fact that this hit this quarter is transitory, I have a goal as I look out, and it's a personal goal. In the fall this year, I think we could be in mid-2s to high-2s levered credit. The reason we're doing this transition and this transformation in the company is, and again, I'm not a macro guy, but I really believe that having an exceedingly strong balance sheet going into 2019 would be a phenomenal asset for the new Spectrum Brands to have. And so I'm laser-focused on achieving that. That said, I have 0 intention to defend our stock, but I will tell you from the seat -- sit as a Chairman looking at M&A, I see lots of deals all the time, and these are small subscale assets that people are asking 14x and 12x EBITDA for. And quite frankly, looking at the amount of proceeds we're going to get in, having a 3-year plan where we can buy back $330 million roughly of stock every year for 3 years, given where our stock currently trades, I'm a huge believer in the value of our stock here. I think it's exceedingly cheap in a world with a lot of overvalued assets, and I wanted to have that optionality. But I'm going to wait for the cash to come in from operations, and we're going to go -- let the HRG close at the end of June, and we're going to let some balls drop and make sure we get that cash on the dispositions of batteries and appliances. But I hope that answers the question.

Your next question comes from the line of Faiza Alwy with Deutsche Bank.

So Dave, can you talk about what gives you the confidence that these consolidation actions will not result in further issues going forward? And essentially, what I'm asking is, what does your new guidance assume in terms of getting these facilities operating normally? And why do you think these issues won't come back? Because it seemed like we were past some of these issues, and then -- and now we're dealing with them again. So perhaps if you could give us more detail around what specifically happened, that could help us assess whether these are truly onetime. So any perspective on that would be really helpful.

And no, listen, thank you. I appreciate the question. Listen, I think management largely thought in the fall that we were going to be okay. And I think when we got into the peak season of starting to produce really heavily into March -- March month, that's when we saw -- or we didn't see it until the second week of April, but that's when the problems started. Look, I don't want anyone to be under any illusions. I am not a magician. I don't have a magic wand. We're not going to fix this overnight. I do feel that this recovery will take place gradually over the next several quarters, but I am already through April and I see material improvements, and I need to relay those to you. Look, I want -- why don't I let Doug walk you through exactly the logistics of what happened in the month of March? I think that granularity will help you understand just how onetime it is.

Yes. In terms of the Dayton and the Kansas facilities. In Dayton, as you know, we moved multiple manufacturing and distribution operations into one location in Dayton, Ohio. And we did that during our relatively low season, so right after the busy season last year, and got those lines all in and -- into the fall and up and running into the fall. But as we really started to ramp up production in the March time frame, which is also the same time that distribution ramps up for our busy season, we began to see some constraints in our ability to run at full efficiency. And as David said, we dropped in one of our better operators to help on the op side and to help clear distribution, and we're seeing that come through -- begin to come through in April. But in March, we really hit a wall. And it precluded us from producing as much as we wanted to, it led to some unfavorable variances and also precluded us from shipping everything. Kansas is a bit of a similar -- similar discussion, although there wasn't an operations or a manufacturing element there. In Kansas -- recall, we had an East Coast DC and a West Coast DC. We got the West Coast in, we got it all settled down into the end of the calendar year last year. And then in late January through February, we threw our East Coast DC in, which was a higher complexity, hardware part of our business. And putting that in there was a bit more challenging than the team thought it would be and also caused backups across the entire facility, just the amount of activity that was hitting the facility, and that caused us -- caused our backlog to begin building again in HHI, and that was a little over $20 million of build in the backlog that we didn't get out during the quarter. And the team is -- again, during the month of April, we're beginning to see every day shipping levels that are exceeding the prior day, and our 7-week -- 7-day shipping average is climbing back up again. So we have confidence that through the rest of the year, the HHI team will get the DC settled down and back into the right operating rhythm.

But let me just add to that, at the risk of being verbose, there's another element in March which is onetime. We shipped a tremendous amount of private-label product, both on our Home & Garden side and our Global Auto Care side. That has material impacts on the margin structure. As you enter into April, we are shipping -- a much higher percentage of shipments going out are branded, and therefore, fueling better margins, in addition to the efficiencies we see, both on the manufacturing and the fill rates inside the Dayton facility and also the debottlenecking of the distribution at both Dayton and Kansas. And we're seeing that this month, and we should relay that to you. Look, at the end of the day, if you really want to simplify this, this was a sales mix issue. This is entirely a margin mix issue from factory inefficiencies. We used to be able to put liquids in bottles very efficiently and ship them efficiently. We will do that again.

Okay. That's really helpful. If I could just ask one more question on the Small Appliances sale. At CAGNY, you guys had said that the gross proceeds are going to be around $1.6 billion to $1.7 billion. It seems like you're backing off from that, and it seems like the timing is delayed. So Dave, maybe if you could give us some perspective on, is there a proceed number or a multiple at which point you might choose to -- below which you might choose to keep the business?

Look, I think what I would say to that is this: We're in active strategic discussions to dispose of the business. And if we have updates when we get to a definitive deal, we'll announce them. In terms of timing, look, I'll give you color there. When you go to do carve-out financials, if -- that may -- we may have underestimated how much work it is to really carve out 2 businesses from 150 different countries around the world, financially, legally and from a human resource side, and that's where I really have to thank our finance teams across the globe and also our partners in Energizer. They have been absolutely fantastic at helping resolve that. And as that gets resolved, it helps expedite the time line for the disposal of appliances. But what you see in the release is -- quite frankly, I'm not a big guidance guy. So I'm CEO now. I want to try to wean this company off of guidance. I'm not a huge fan of it. I think all it does is it puts pressure on management teams a lot of times to do things that are not appropriate because they're under pressure for some sort of short-term deadline. We are going to run this company with a new vision, with new clarity and maniacal focus on where do we want to be in 2020, 2022 and 2023. 3- to 5-year plans on where we want to be, where we're going and we're going to be a much smarter, faster, more nimble, stronger business. I hope that takes care of the question on appliances.

Our next question comes from the line of Bob Labick with CJS Securities.

Sorry to go on the same topic again, but I just really want to talk about the margins, and particularly in Global Auto but also HHI. Obviously really impacted. Can you talk about how much of it -- your confidence in restoring them to the current -- to last year's levels, if there's any impairment going forward and the time frame and the steps to get margins, I mean, they're dramatically lower obviously, so to get them back to where they are?

Yes. Look, there's -- this is why, in a way, I look at these challenges and I see them as opportunities, right? There's 4 big drivers. When you build a new facility, you underwrite a certain standard cost, right? And so if you think about what was the rationale behind taking 5 facilities in Auto Care and putting them into 1? Well, everybody buys on the phone. Everybody expects the product to be at the doorstep in 24 hours. There is no question that having 1 facility produce all the product and distribute the product is, by definition, much more efficient than picking and producing out of 5 different facilities to ship to a customer. So the strategic merit of it is 100% sound. What you had happen is you had some operators that underwrote the business that would be below standard costs. And when you start up a greenfield and you assume certain standard costs, but then you're not -- your fill rate is in the 80s, when your customers want it in the high 90s, now you have your cost of goods sold per piece is going through the roof. Additionally, you're -- because you've got a greenfield and you've got a lot of turnover in the employee base, the learning curve gets keeping reset as you put people in there. That's also, guess what, driving costs through the roof, which hurts margin structure. So the inefficiencies leading to higher COGS are both tied to the production levels or costs, which are higher than the standard costs, which were priced on the stand-up of the facility, plus massive investment right now in customer support level. We want to stay on the shelf, we want to keep our customers happy. So you combine that and then you get distribution backlogs and inventory builds up, your working capital builds, so you're having higher charges there, but then you have less absorption into the factory, right, because you're moving that slower. And then you have what I just talked about, which is this mix, and you don't see it because you don't sit inside the company like I do, but when you ship all your private-label product in March and not much of your branded, that's a massive dampener on margin. But if I flip it and I look at the inverse of the equation, which is what we are doing now, when you restore efficiencies and you move back toward standard costs in the facility, your COGS drop, your margins expand. If you unblock the passageways in front of the production line, which was blocked before we dropped Steve Keller in there, and you may need to use some third-party 3PLs in the short run, which again boosts costs, now you're starting to get distribution back. Your fill rates -- we are seeing our fill rates go up, so our cost of piece is dropping, you remove the distribution bottleneck. Now you're flowing the inventory faster and then you get the lift in the absorption [in the factory] overhead. So that's why I'm very confident that the underlying margin structure is intact.

Got it. That's really helpful. Yes, that was very helpful. And then maybe just in terms of, obviously, this is a big focus right now, call it a distraction, whatever the word would be. Is this impacting any other parts of the business, product innovation and other things? Because I agree with you, a year from now everything is going to look very different than it does today, but is anything that's causing the issues today going to impact the potential growth opportunities a year from now, and how are you trying to prevent that from happening?

No. Honestly, I -- we have separate departments. I mean, thank God, we have a very deep bench. Probably one of our deepest benches is HHI. So this is very isolated. I guess, listen, I got to thank David [Bohr] he's one of our guys. He's literally camped out in Kansas 24/7. But that's just a distribution thing. You fix distribution in Kansas, your margins are back. You fix production efficiency and distribution in Global Auto Care, your margins are back. And oh by the way, guess what? Because of inflation, input costs and freight -- I mean, you can read, it's very hard to find a truck driver in this country. But guess what happens when you get your customer levels back up, now you can price. So, look, there's lots of levers to pull. We're all over it. Innovation is going to get more dollars. If you want a more, more, more of the future out of Dave Maura, it's more innovation, more new product development and much more news and excitement. That's what you're going to see out of Spectrum Brands in 2019 and beyond.

Your next question comes from the line of Olivia Tong with Bank of America Merrill Lynch.

A couple of questions to understand the outlook a little bit better. First, why is the impact of the miss so much higher on cash than on EBITDA? And then in terms of your market shares, can you give a little bit of color of shelf space, inventory within retail, and how your shelf space may have or may have not been impacted because of the shipping challenges?

I've spoken too much. So 'm going to hand it to Doug.

Olivia, the cash impact on this is obviously partially driven by the EBITDA takedown. But because we are working through these 2 facility consolidations at a pace that's a little bit slower than we thought, I'm expecting inventory levels to be a little higher even than planned. So it may be $20 million, $25 million there. And as you've seen also in our numbers today and as David has mentioned, we're investing in our customer relationships and making sure that we are shipping everything we can ship to customers. And while that's improving, it's costing us some extra money. So our restructuring cash is a little higher this year. And then as you know, interest rates are rising a little bit. We have little more working capital through the year than we had planned and we repurchased $250 million in shares of stock, so cash interest is about $15 million higher as well. On the -- yes, on the share, shares at retail are in pretty good shape. We do continue to see some of the major mass retailers continue to turn -- squeeze inventory a little bit, but nothing like we saw last year. In fact, there are some signs that they have hit bottom and are at their optimal levels or circling around their optimal levels. One exception to that is some online customers are dialing in weeks of inventory a little bit. But our share on shelf and our positioning on shelf is similar to last year.

Got it. And then, Dave, you sound pretty darn confident that things are going to get better. Your guidance, obviously, on EBITDA and cash flow would suggest that you expect things to stabilize pretty quickly. And so do you think this is sort of -- like, the outlook is sound from here? Just because you also on the flip side talk about how you want to get back to normal efficiency. You're not going to rush it. It sounds you're part of the way there, but clearly not all the way there. So I'm just trying to marry those 2 sort of divergent paths of statements that we've heard today.

Yes. Look, I'm a perfectionist. I absolutely want this company to be the best customer service company in the industry. That's why we initially, strategically, did what we did with the Kansas facility for HHI and what we did on Auto Care. We simply took on too much, too fast. And the operators did -- we experienced operational executional failures. We -- like I said, I see recovery and again, it's -- when you're shipping more branded and your fill lines are getting better, it's just -- it does miracles to margins, let's just say that, but I don't want anyone under any illusions. This recovery is going to take place gradually over the next several quarters, but the recovery is going to be good. But my personal standards are much higher than that. And so for me, look, I think HHI will make a lot of progress and will probably be pretty darn close to where I personally want it to be in the fall. To get Auto Care to be really where it should be and to really return the full earnings power of the company, we're in season now. We can't fix everything. We're going to have to produce the best we can, ship the best we can, and you'll see better results over the next 6 months. But to get it to where I want it to be is probably a year, and that's what I told my board. I said, listen, this is 12 to 18 months to get this where I want it to go. But you can create a lot of shareholder wealth in a shorter period of time, and that's what we're going to do.

Your next question comes from the line of Joe Altobello with Raymond James.

So first question, I just wanted to clarify, David, earlier to a question -- or an answer you gave to a question about the Personal Care appliance sale. Back at CAGNY, you did say a number of or -- Doug did say of [1.6 to 1.7] in terms of expected proceeds. Is that still the case?

Yes, I said I don't want to address that. I want to walk away from this guidance stuff. I -- we are in dialogues with strategic acquirers. We are working through it. I do not have a definitive deal. When I get to a definitive deal, I'll give you a number. But no sense trying to update numbers when I don't have a definitive deal.

Okay, but there are multiple bidders? And it sounds like there was interest in that business.

When we launched this process, we had an incredible amount of interest on this. And you should assume that the number that the company tried to give you at CAGNY was to try to help you with a pro forma balance sheet because there was confusion in the marketplace. And yes, we wouldn't have represented that if we didn't have letter of intents at that level.

Okay. And then secondly on the balance sheet, you mentioned a couple of times today that you do want to delever pretty significantly. I think the company has typically operated at 3.5 to 4x leverage. This is obviously a rising rate environment. What's the right leverage ratio for Spectrum going forward?

The right leverage ratio depends on so many things. It's impossible to give it to you. I told you earlier in the call, just by collecting over $500 million of cash in the next 5 months from our operation, assume -- let's take a base scenario. We closed a battery deal, we paid down $2 billion of debt. You've got a calculator, you can figure out very quickly that our leverage will drop into the mid-to-high 2s. I personally would like to run the company there for a while, okay? Because, one, I want to -- just like you, I want to make sure that our house is in order and we are starting to deliver and under-promise and over-deliver to you guys as shareholders. We need to do that first. We need to make sure we are tick and tied and everything's running tight as a top. When that happens, and I'm convinced we can then deploy capital again, we'll look around. I just don't see anything today that, even if our house was in order, it would be worth purchasing. I think valuations are stretched. Interest rates are rising, and my #1 priority is to protect the balance sheet.

Okay, one last one. Obviously, this is a tough question for you. But how much did you kitchen sink the guidance today? How comfortable are you that in 3 months, we're not going to have a similar conversation?

That's a fantastic question that I'm not going to give an answer to.

And your next question comes from the line of Shannon Coyne with BMO Capital Markets.

Can you talk more about the consolidation of the Pet and Home & Garden and the Global Auto Care division? Seems like this is a big departure from how you've run the company in the past, which is more like a holding company. Can you talk more in detail about those changes that you're making and why that's now the right way to run the business?

Yes, absolutely, and I appreciate that question. Look, I'm all about simplicity and clarity. I think this company tried to do too many things, be too many things to too many people. And on why the decision specifically? One of my very best operators is Randy Lewis. And I made the comment earlier, he runs that Home & Garden business like it's a military operation. I mean, honest to God, when I gave him capital a couple of years ago to expand our aerosol capacity, he always gives me back way more than he promises me, and he's run that thing efficiently. When I took over the business 10 years ago, we had $35 million in EBITDA coming out of that unit. Home & Garden today is a $125 million, $130 million EBITDA business under Randy's stewardship. He is a phenomenal operator. We spent $1.4 billion to buy Auto Care. Auto Care went from $138 million in EBITDA to $147 million to $153 million and it should hit [$160 million] plus, right? We had a major misstep, okay? And my job is to make sure that we create wealth. And so when I see an operational issue like that in Dayton, I take pretty swift, decisive, corrective action. And given the similarities in the operations, right, it's just putting liquid in bottles. It's just canister wipes. It's just aerosol going into a can. Randy's team knows how to do that better than anybody. So I think this is phenomenal from an operational standpoint. Now what I told Randy is, quite frankly, I want to see more resources, okay, on sales, marketing and, quite frankly, the commercial strength, the backbone of our Pet and our Auto Care divisions going forward. But my #1 priority is to solve an operational issue and bring Dayton into operational excellence. Randy will accomplish that task, and that's why I did it.

And just maybe one more, you talked about once you get through fixing the efficiencies, you talked about your ability to take price up. Can you kind of talk through by category why you think you can take prices going forward, given the environment that we're in right now, and maybe which category will be easier or harder than others?

I'm not going to get into specifics, but I appreciate the question. Look, you can look across the globe, there's inflation from every piece of metal, commodity. We have -- I guess the millennial generation doesn't like driving trucks, because you can't find truck drivers. Look, at the end of the day, freight and input costs is through the roof. And everybody's taking price. And I'm taking price in some of my, what I consider my weaker business units. And so I know that once I get excellent in efficiency and we restore customer service levels in our higher-valued franchises with our best brands, we have pricing opportunities. That's all I'm going to say about it.

And your next question comes from the line of Carla Casella with JPMorgan.

I'm just wondering if -- are there dates set yet for the shareholder votes?

I'll let Doug or Nathan take it.

No. At this point, we haven't. The proxy materials are in for review and the transaction's being reviewed. We don't expect anything to come out of that, but post that, the materials will go out.

Okay. And then can you just remind something -- on the Harbinger transaction, when that's finalized, what's the movement of cash and the debt either assumption or pay down that happens at that time?

Yes. Similar to the information we put out before, we expect that it will be (inaudible) net debt. With that combination of debt and cash that comes over is -- it won't be known until we close the transaction, but something in that range.

Okay, great. And then just one last one. Given, I mean, the difference in your business today versus a year ago in terms of the segments and some of the M&A, how seasonal is the overall company SG&A, and has this seasonality changed materially?

The flow of SG&A is actually fairly similar outside of advertising and marketing, of course it would be more in line with the heavier parts -- heavier selling parts or the times of the year for our businesses. But in general, the SG&A across the businesses is fairly stable. That obviously leads to different ratios throughout the quarters.

I mean, Carla, listen, I think specifically given that we're talking at the end of April, I mean, there's no question, right, that with Auto Care and Home & Garden, you do have a more seasonal spring business. And like we're seeing it now, right? I mean, I told you about the private label and the weather issues in March. When I used to sit in your seat, I hate companies talking about weather, but it really did impact March, and you can see the lift in April. And so it's -- I went to bed last night looking at the weather report, and they're calling for 70, 80 degrees and sunny in the Northeast, and I'm thrilled. But yes, the revenue and the margin mix are a little bit more seasonal in the pro forma company.

Okay, great. And then have you broken out anywhere -- provided any presentation where you showed last year's quarters pro forma for the move of the -- into the noncontrolling ops, the pet -- the batteries, sorry, and appliances?

No, that'll roll out quarter-by-quarter, but we can get you some information offline on both. All right, the information is all in there, if you do the math, so we know we can help you with that.

Your final question comes from the line of Karru Martinson with Jefferies.

Just on shipping side of the equation. Obviously, the trucker shortage will continue, but where do you see kind of the pricing for yourselves and the industry kind of catching up to those costs?

Well, that's obviously a supply and demand issue (inaudible). While we do have very good contracts in place with many of our carriers, they roll over at least once a year throughout the year. So we will experience a little bit of inflation as we continue through the year there. But that will be very consistent with anybody else shipping across the U.S.

Okay. And just on the weather impact for the garden side. In terms of your product mix, I mean, do you feel that if you get that cold start to the season that you -- some of those sales are lost? Or do you feel those can be picked up as we go forward?

Our expectation at the moment is if spring breaks, gets back to a more normal pattern pretty soon, that the season will be intact.

Thanks, Karru. And with that, we have reached the top of the hour, so we'll go ahead and conclude our conference call. I certainly want to thank both David Maura and Doug Martin. And on behalf of all of us at Spectrum Brands, thank you for participating in our fiscal 2018 second quarter earnings call. Thanks again.

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