Spectrum Brands Holdings Inc (SPB) 2019 Q1 法說會逐字稿

Good morning. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands' Fiscal 2019 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, February 7. Thank you.

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

Thank you, operator, and welcome to Spectrum Brands Holdings' Fiscal 2019 First Quarter Earnings Conference Call and Webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today.

Now to help you follow our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at spectrumbrands.com. This document will remain there following our call.

So if you start by turning to Slide 2 of the presentation, you'll see that our call will be led today by David Maura, our Chairman and Chief Executive Officer; and Doug Martin, our Chief Financial Officer. David and Doug will deliver opening remarks and then they will conduct the Q&A session.

If we turn to Slide 3 and also Slide 4, we want to note that our comments today do include forward-looking statements, including our outlook for fiscal 2019 and beyond. These statements are based upon management's current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially. Now due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 7, 2019, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statement.

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

With that, I will now turn the call over to our Chairman and CEO, David Maura.

Thank you, Dave, and thanks everybody for joining us today for this call. Before jumping to our Q1 results, which, I guess, I need to tell you to turn to Slide 6, I want to highlight some of our strategic achievements. We are exiting a period of significant transition, and we're now entering a period of stability with meaningful operational opportunities.

In January, we made major progress in completing our transformation into a meaningfully less leveraged and much more focused consumer products company with materially increased financial strength and flexibility to drive our long-term growth ambitions.

We closed on the divestiture of both our Global Battery and our Lighting businesses, and we also sold our Global Auto Care business. These 2 asset sales brought us to combined gross cash proceeds of approximately $2.9 billion, along with 5.3 million shares that Energizer issued to us, making us one of their largest shareholders.

We also were able to utilize capital and net operating losses to minimize cash taxes on these transactions.

Using the battery and auto care proceeds, we moved quickly in January to repay in full all of our cash flow revolver, which had about $114 million on at the time. We prepaid in full all of our U.S. term loans, totaling approximately $1.23 billion. And we just recently last week redeemed all of our $890 million of our 7.75% notes. These were the former HRG bonds.

These actions reduced our debt by over $2.2 billion and represent major progress to achieve our goal to significantly delever and strengthen our balance sheet, materially reduce our cash interest payments for the balance of this year and beyond and further improve the tenor of our obligations.

As the results of these -- as a result of these steps early this year, we are on track to achieve our leverage target of approximately 3.5x at the end of this fiscal year. As we have delevered balance sheet, we may look to repurchase our shares under the repurchase agreement in the open market or otherwise from time-to-time.

If I could have everyone turn to Slide 7, now turning specifically to the quarter. Q1 is traditionally the smallest quarter of our year, and we delivered results that were generally in line with our expectations. We also continue to expect the second half of '19 to be larger than the first half for both sales and EBITDA, driven by the seasonality of our Home & Garden and typically the stronger back half we experienced in HHI.

We're very pleased by the strong start this fiscal year in our pet care unit. Although Q1 growth was just 2% organic growth, it was led by double-digit increase in the United States markets. As a turnaround of this business is now underway, we're continuing to focus our efforts to improve the pet performance in Europe, primarily the dog and cat food assets.

HHI faced a difficult comp this quarter. It had a 13% net sales growth in the period last year and that was driven largely by hurricane-related -- hurricane recovery revenue in retail. It was also driven by 2 significant nonrepeating promotional loadings last year to significant customers and quite frankly, the impact this year from a softer U.S. housing market and we began to see the effects of that late this November. We now must work closely with our retail customers to drive this business forward, despite the recent headwinds in the new housing markets, which, again, we began to see in November. We still expect a strong performance from HHI this year, driven by strong innovation such as the recent unveiling of a new line of Wi-Fi-enabled Halo Smart Locks at the Consumer Electronics Show just this past January.

As expected, our home, appliance and personal care business started slowly. We're reintegrating this business and we stood the business back up this quarter. We're focused on improving the business fundamentals and we're lapping difficult first half comps. Additionally, we're increasing -- materially increasing investment spend to drive innovation throughout the year and into 2020. We are stabilizing Home & Personal Care, and we're expecting improved performance as we move through the year.

As a terrific example of the new thinking about the business, this morning we're excited to announce a major new global 5-year partnership between our Remington personal care brands and the Manchester United football team. This is an alliance that we believe will showcase the depth and the strength of our Remington line worldwide and begin the process of further strengthening the amazing brand equity inherent to this business unit.

Home & Garden had slightly lower sales and that was due to the absence of a strong prior year revenue from the aftermath of Hurricane Maria that we had in Puerto Rico. Q1 is Home & Garden's seasonally smallest quarter, representing only about 10% of its full year sales. We expect sales and EBITDA growth for Home & Garden this year driven by new distribution wins and improved product mix.

Now if we look at the full year fiscal '19 outlook and you can turn to Slide 8 for that. We are today reiterating our fiscal '19 adjusted EBITDA guidance of $560 million to $580 million versus a 2018 pro forma adjusted EBITDA of $581 million for the same 4 continuing businesses. This guidance includes the impact of a significant increase in targeted and impactful investments in advertising, material new product development initiatives and marketing to improve both the vitality and the strength of our product offering to put Spectrum Brands back on a meaningful growth trajectory beginning in 2020.

2019 is a year of focus for Spectrum Brands. It's a year we will materially step up investment, spending behind our major brands and the continued alignment of our organizational structure and operating processes to streamline our activities and reduce waste. We are establishing clear lines of accountability, and this is providing for quicker decision-making behind a much stronger balance sheet with ample liquidity.

In closing, our team is singularly focused on creating shareholder value by strengthening and innovating behind our strong portfolio of leading consumer brands, delivering operational excellence in our manufacturing facilities and supply chain and providing all of this with exceptional customer service. In short, we are becoming the faster, smarter, stronger Spectrum Brands of the future, and we're being driven now by vision, clarity and focus.

With that, I will turn it over to Doug.

Thanks, David, and good morning, everyone. Turning to Slide 10 and a review of Q1 results from continuing operations and we begin with net sales. First quarter reported net sales of $874.6 million, decreased 4.9% versus last year. Excluding unfavorable foreign currency of $13.6 million, organic net sales fell 3.4%. Higher pet sales were more than offset by lower Home & Personal Care and Hardware & Home Improvement revenues.

Reported gross margin of 34.9%, increased 30 basis points from 34.6% last year primarily due to product mix. Reported SG&A expense of $259.6 million or 29.7% of sales compared to $233.5 million or 25.4% of sales last year, primarily due to the one-time recapture of $29 million of noncash depreciation and amortization charges that were not recorded last year due to Home & Personal Care's discontinued operations status as well as lower acquisition and integration and restructuring and related costs this year.

I'm going to just take a minute and talk about this depreciation and amortization adjustment this year because it not only affects this quarter but also the remaining quarters in the year. This adjustment is a catch up -- a noncash catch-up adjustment required as we put the HPC business back into continuing operations for depreciation and amortization that would have been recorded in Q2, Q3 and Q4 of 2018, all of that catch-up was recorded in Q1 of 2019. So going forward, it will also impact our year-over-year comparisons for 2019 Q2, Q3 and Q4 because last year we had 0 depreciation and amortization this year, we will roughly $10 million in each quarter.

Moving on then to reported operating margin, also impacted by this depreciation and amortization adjustment, at 2.8% margin in the quarter versus 5.6% in the prior year. On a reported basis, Q1 diluted loss per share from continuing operations of $0.56 decreased compared to diluted income per share of $1.24 last year, primarily due to the recapture of $29 million of noncash depreciation and amortization, lower interest expense, a tax benefit last year attributable to U.S. tax reform and higher shares outstanding this year as a result of the HRG merger. Spectrum only adjusted diluted loss per share from continuing operations of $0.20 decreased versus adjusted diluted EPS of $0.68 last year, primarily due to the Home & Personal Care depreciation and amortization adjustment, which contributed about $0.41 to the decline as well as lower volume and an income tax benefit in last year's first quarter due to U.S. tax reform.

Turning to Slide 11. Reported interest expense from continuing operations in the first quarter of $57 million, decreased $18.4 million from $75.4 million last year, due to the pay down of HRG-related debt. Spectrum-only cash interest payments of $56 million were $1.5 million lower than last year, driven by the timing of payments on our cash flow revolver. Spectrum-only cash taxes of $10 million were flat compared to last year. And in addition, we incurred about $12 million of taxes for activities related to our battery business carve-out.

Spectrum-only depreciation, amortization and share-based compensation from continuing operations of $72 million increased from $43 million last year, primarily due to the recapture of depreciation and amortization for Home & Personal Care as a result of their continuing operations classification in Q1 of this year.

Spectrum cash payments for acquisition and integration and restructuring and related charges for the first quarter of 2019, including discontinued operations, were $6.1 million and $9.9 million, respectively, versus $5.3 million and $24.8 million, respectively last year. The reduced costs were driven by the absence of last year's operating inefficiencies in our HHI Kansas D.C. facility, acquisition cash costs last year related to our battery and appliance divestiture processes and HRG merger costs.

And now on to our business units, from continuing operations beginning with Slide 12 in Hardware & Home Improvement. HHI reported Q1 net sales of $305.1 million, decreased 6.4%, driven predominantly by the absence of strong prior year U.S. hurricane revenues in the retail channel across residential security, plumbing and builders' hardware, 2 significant nonrepeating promotional load-ins from customer wins last year in residential security and recent market -- housing market softness. Excluding unfavorable FX of $1.6 million, organic net sales fell 5.9%.

Reported adjusted EBITDA of $55.6 million, fell 7.3% with a reported margin decrease of 20 basis points due to lower volumes and unfavorable operating expense leverage.

New product introductions continued at a steady pace in Q1, reflecting HHI's strong vitality rate. And we still expect HHI to have a solid performance this year.

Now to Home & Personal Care, which is Slide 13. HPC reported Q1 net sales of $317.2 million, fell 7.3%, while organic revenues of $327.4 million, decreased 4.3%, excluding unfavorable effects of $10.2 million.

For personal care, strong growth in Latin America was more than offset by decreases in the U.S., primarily from the impact of prior year losses, retailer distribution adjustments in mass and drug, e-commerce softness; and in Europe, primarily due to Brexit-related soft consumer demand in the U.K.

For small appliances, growth in Latin America, Canada and Asia Pacific was more than offset by lower U.S. results, primarily from e-commerce and in Europe also driven by Brexit-related soft consumer demand in the U.K.

HPC reported adjusted EBITDA of $35 million, fell 16.1% with a 120 basis point reported margin decrease. The lower EBITDA was due to reduced volumes and unfavorable product mix. Home & Personal Care expects an improved second half with new product introductions in the U.S. and Europe and expanding distribution.

As David mentioned, Remington today also announced a 5-year partnership with Manchester United that will provide significant brand exposure and given the club's worldwide reach and following will be terrific for our brand. This is a good example of the step-up of investment we're making -- step-up in spending we're planning across the company this year and into the future.

Moving to global pet, which is Slide 14. Q1 reported net sales of $204.7 million, grew 1.1%, primarily due to double-digit increase in U.S. companion animal revenues, predominantly dog and cat chews and treats, partially offset by lower U.S. aquatic and European companion animal sales. Excluding unfavorable FX of $1.8 million, organic sales increased a solid 2%.

Reported adjusted EBITDA fell 14.7% to $29 million, with a 260 basis point margin decline to 14.2%, driven by unfavorable product mix and higher distribution costs. In fiscal 2019, pet expects solid performance in its largest region, the U.S., as it continues turnaround work to improve profitability of its European operations, primarily the branded dog and cat food business.

Turning to Home & Garden, which is Slide 15. Home & Garden Q1 reported net sales of $47.6 million, decreased 3.4% as a result of the absence of strong prior year household control and repellent revenues in Puerto Rico in the aftermath of Hurricane Maria. As a reminder, Home & Garden's first quarter is its seasonally smallest quarter, typically comprising about 10% of full year revenue.

Reported adjusted EBITDA of $3.1 million decreased 42.6% and reported margin of 6.5%, fell 450 basis points. The decline was the result of the timing of seasonal production, unfavorable product mix and higher input costs. Home & Garden continues to expect sales and EBITDA growth in fiscal 2019, driven by new distribution wins, improved mix and strong continuous improvement savings.

Moving to the balance sheet on Slide 16. We ended the first quarter of fiscal 2019 in the solid liquidity position, including $664 million available on our $800 million cash flow revolver and a cash balance of $252 million with debt outstanding of $4.8 billion.

Then our liquidity and capital structure position experienced a step-change improvement in January as the company prepaid in full all of its U.S. term loans totaling $1.23 billion, $114 million on its cash flow revolver and redeemed all $890 million of our 7.75% bonds using proceeds from our battery and auto care divestitures. As a result of this debt reduction of more than $2.2 billion, pro forma as of December 30, 2018, and using trailing fourth quarter EBITDA from continuing operations, our gross and net leverage were approximately 4.6x and 3.1x, respectively, down from 5.8x and 5.2x at the end of fiscal 2018. This reflects a 46% reduction in debt from our fiscal year-end.

Q1 capital expenditures from continuing operations were $13.5 million in the quarter versus $20.3 million last year.

Now turning to Slide 17 and our 2019 guidance. We expect reported net sales growth from continuing operation in 2019, driven by innovation, increased marketing investments, pricing actions, which include tariff-related increases now expected to go into effect on March 1 and market share gains. We now expect FX to have a negative impact on sales of approximately 150 basis points based on current rates. We reaffirm our guidance for adjusted EBITDA from continuing operations to be between $560 million and $580 million, as we stabilize operations and increase revenue-generating investments in an inflationary environment, including the anticipated impact of tariffs and input cost increases, partially offset by pricing actions. We have $1.3 billion of usable federal NOLs remaining post the asset sales and have used all of our capital losses. For adjusted earnings, we now use a tax rate of 25%, which includes state taxes.

Thank you. And now back to Dave for questions.

Thanks, David and Doug. Operator, with that, you may now begin the Q&A session, please.

(Operator Instructions) And your first question comes from the line of Olivia Tong.

I wanted to start with free cash flow and your full year expectations there because your cadence has always been for a back-end loaded year given the payments of the season -- and the seasonality in your businesses. But this year's Q1 loss is significantly larger than years past. So can you talk through a couple of puts and takes there? Are there any exogenous events? Obviously, the loss from disc ops is a big chunk of that. So how much of Q1 in your view is tied to businesses that are now no longer part of your portfolio versus those that are in your go-forward businesses?

Look, I think, this year, we got a lot of moving pieces, but I think we're really starting to settle things down. Clearly, we just paid off $2.2 billion of debt, a little bit more than that. And -- I mean, you can do the math on that on a rolling 12-month basis. That frees up about $129 million of cash interest. So obviously, that's increasing the free cash flow going forward by a material amount. We've kind of stayed away from giving free cash this year because we've got so many moving parts, and we're still not done with all of our capital allocation decision-making, which will affect that. But why don't I let Doug take the nitty-gritty of it and see if that helps you with the question some more.

Yes, you're absolutely right, Olivia. There were a lot of pieces in the first quarter that are noncash related. So the additional write-down of the GAC business to reflect the net proceeds we receive on that is a big one. The doubling up of the depreciation and amortization -- the catch-up of the depreciation and amortization relating to the Home & Personal Care reclassification is in there. The fact that the 2 businesses that we sold in January were in our cash results for the first 3 or 4 months depending upon the business. And as you know, we used cash this part of the year across all of our businesses, as we're investing in inventory for our season. So there are a lot of moving pieces that will make this year's cash flow numbers really not representative of the continuing operations of the business. And so some of the cash we received in proceeds, we would have ordinarily flowed through free cash flow this year, but they become working capital adjustments or working capital targets in those sales. So it's just a confusing story. And as David mentioned, when we make the capital structure choices and when the interest payments on our existing debt would have been paid, also impact free cash flow for the year. So the short answer is, we're not going to update guidance on free cash flow this year, but we'll give you as many pieces as we can. We still have significant NOLs. We still expect to be a relatively modest taxpayer -- cash taxpayer going forward. We expect to invest in CapEx at about the 2% rate across the business going forward. We expect significant improvement in restructuring and A&I expenses this year. And then, again, David gave you kind of the parameters to do the math and what we've decided so far on the capital structure. I know it's a lot of story, but that's also the reason we're not giving specific guidance.

Got it. Maybe if I could turn just to sales, sort of soft guide down from "meaningful growth" to just growth. I guess, if you could break that down, is that simply a reflection of the lower Q1 base? Or did you also ratchet down your expectations for the remainder of the year? And can you talk about sort of, part and parcel with that, the order of magnitude of some of the investments that you said you're planning to make around advertising and R&D and the like?

Yes. Look, I think the quarter actually came in, as we said in the opening remarks, largely in line with what we planned. To be very blunt, the only thing we saw in the quarter was a little bit of weakness in HHI. So we expect a little bit more sales there. Look, I think when we spoke to you last time, we had anticipated pricing a bunch of tariffs at the end of the calendar year that, obviously, got postponed. And so that was in the revenue guidance there. Organically, I expect a very good year out of particularly pet and Home & Garden. And we still think we have a pretty solid year in HHI. Obviously, it's going to take us a couple of quarters to get appliances stood back up and reinvest and get that healthy. But we -- as we go out to retailers and we're talking to them about the new investments we're making both on innovation and also consumer insights and actually communicating the message, we've just been very weak there, particularly in the U.S. on the marketing side. As we rebuild that, we're capturing a lot of new orders. In fact, I think even in the last call, I talked about some of the new wins we're getting. But if I get a new win today, a new listing today, I don't ship it for 6 months in that business. So that's really where we see kind of the June and September quarter being much stronger in that particular unit. But look, I would say if there's anything that changed from the last time we spoke till now, it's -- yes, we have a weaker housing market and we need to be on guard there. We need to have contingency planning. We got to work much more closely with our retailers to make sure we bring that year-end as we originally planned, because we definitely feel the effects of the Fed interest rate hikes and we definitely see the effects, particularly in new home sales that have declined as a result of that. Does that help you?

Yes. I mean, I guess, could you talk about the benefit...

Yes, I don't want you to think that there's any less confidence in the full year guide other than there's a delay on price -- on the pricing for tariffs and we see some softness in housing.

Yes, the only additional thing on a reported basis, Olivia, is that we moved FX guidance from a modest impact to a 150 bps based on the first quarter on where rates are today.

I missed that. Thank you, Doug.

Yes. I guess, just following up on the housing and the impact on HHI, I mean, what kind of benefit do you think you guys had in the past because of the favorable housing market that now you expect to unwind?

Yes. Look, I think, in general, we enjoy a dominant position in what I call kind of replacement cycle model. So we have the largest installed base in The United States with our Kwikset product. And we've got Smartkey technology, which is a material advantage versus our competition. We're seeing real increase in the adoption of mechanical locks and real excitement around some of our new Bluetooth and Wi-Fi locks. So I think we'll continue to have gains on the innovation side, and we hope to continue to drive that business. I would say that we're not -- but we're not immune, right? So 75% of that business called is replacement cycle business. It holds up well. But we are -- the other piece of that is new home sales. And so our kind of view and some of the reports we study and metrics we look at, we figure that every 25 bps that the fed has raised rates it's kind of destroying, or making unaffordable, I guess, would be the better way to phrase it, probably 10% to 15% of buyers. And so we actually agree with the recent stance of the Fed to pause, because housing is such a critical part of the economy. And in fact, I think with the market turmoil plus the Fed increases in kind of late November and December, I think in general if you talk to our competitors, talk to our retailers, there was some real softness. Recently, we've seen an uptick. And again, I'm not using this call to say, there's an all clear at all. I think housing headwinds are -- we need to plan for them for the balance of fiscal '19, but we're still expecting pretty solid performance out of HHI.

Your next question is from the line of Bob Labick.

So I wanted to shift operationally. Obviously, over the last 18 months or so, there's been quite a few problems, recalls, distribution center consolidation, et cetera. Where are you now in terms of operating performance? Kind of what's left in the urgent pile? And how long should that take? And then when do you get to start shifting to ongoing improvements versus fixing problems?

We're there. So we just took the Board of Directors through Edgerton, Kansas. And our fill rates are 99%. And I'll tell you, if I could have taken you through that facility with me in April, when I first took on this new seat, it was rough sledding. And to take the board through there and show them the clean efficient distribution center that it is now, what we call CFC, I'm really proud of that. And it's funny because all of last year was about how to get the backlog down and how to fill demand. And so now we're flipping that around and we're trying to tell our customers, "Hey, listen, we're very, very efficient. We're exceedingly good with innovation, and we're exceedingly good now in terms of fulfillment and in-time and on-time delivery." And so last year, where we were getting fines. December, we had no fines. So we're -- I think we're there. And we need to flip it around, use it as a strategic advantage now and get off our back foot. And the difficult part in that particular example is we do have headwinds in housing. And so now you've got to use that new fulfillment capability and the excellent customer service and go get more wins and drive the volume. But I think -- look, obviously, we no longer own Global Auto Care, you know that we did a lot of improvement on it. And I think our friends at Energizer are going to finish that work for us over the next couple of years and get that thing humming and where it needs to be. But no, I think the triage that was kind of April through December is behind us. And we're now going on the offensive again. I appreciate the question. It's -- thank you.

Yes, no, great. And it's good to hear. And then kind of in terms of new products, maybe by segment or maybe overall, where do you stand in a relative to other years? Are you at the right mix of new launches? Or do you expect innovation to accelerate? And what does it take to do that?

No, I think we're okay. I think the businesses are different. I would say the NPD pipeline in HHI has always been strong and remains robust. I think Home & Garden has done a pretty good job. Pet is now catching up, but we still got work to do in pet. I think we have a -- actually, believe it or not, I think we have a very healthy NPD team in appliances. And they've done a much better job, honestly, on the European continent of actually getting true consumer insight, getting the right product to the right customer and then communicating to the end consumer the benefits of that product. And that's why you see the big investment today behind Manchester United and kind of making Remington global and really put net brand back on the map. But I think we could do a better job with consumer insights and then telling that story here in North America. And actually yesterday, we just made some management changes in that division. And we're really beefing up the marketing side of that in The United States. And honestly, our retail customers are starting to hear about what we're doing and being good stewards of that appliance business again, and it is translating into orders. But I -- to your point, I think the vitality there could be better, and we need to get that out. And hopefully, we can talk more about that as we get into the back half. Doug, do you want to add anything?

Nope, that's well said.

Okay, great. And one just quick clarification. Your 3.5x leverage target, is that a gross or a net debt target?

It's a target because we have some choices to make yet. So we'll...

I mean, listen, let's be very blunt, right? We've done a lot in a very short period of time, right? January 2, we got a $2 billion wire-in. We immediately moved to pay all the revolver down. We paid off all our term loan. At the end of January, we got some more cash in and we took out all of our HRG debt, $890 million of debt there. And if we just run the business without doing any capital allocation decisions, we'll probably end the year with $1 billion of cash and nothing on the revolver. So I think being $1.8 billion's liquid is probably too liquid, even though I like liquidity. And so we've got some more decisions to make here as we enter the spring and get into the summer. And then that's why we're kind of -- we're just not willing to commit on the free cash flow and the question you just asked. But let us continue to assess, look at market conditions, look at our capital structure and continue to hopefully make good decisions here.

Your next question is from the line of Nik Modi.

Just a couple of questions, quick ones from me. So on the HPC side, you talked about kind of softness in the e-commerce channel and distribution losses, just maybe some more clarity around that. Is that just a function of the fact that you were going to sell the business and so maybe there was some slippages there? That's the first question.

And I guess, the broader question, Dave, when you think about the amount of change that's taken place at Spectrum Brands and the fact that you're kind of heading into peak season, how do we think about kind of disruption, turnover, talent retention, maybe you can just give us some thoughts on that?

Yes. Look -- so I have ADD, so I'm going to probably make you replace -- re-ask some of question. But look, I'll take the talent piece and then remind me your first piece. I actually -- I feel super good about where we are. I think -- look, last year you said it was mind-numbing from not only -- look, if we went back a year, I thought basically just getting the HRG deal done would be our greatest challenge. And then all of a sudden in April, operationally we came off the tracks. And so I found myself not just doing trying to do transform the company, but I was really in the middle of a turnaround. So you're 100% right. The amount of -- whether it was HRG of appliances being on and off the market, batteries actually getting closed, but took over a year to get there, and then pivoting and selling auto, I mean, just a tremendous amount of strategic activity. And then operationally, we had our hands more than full. So I think that's why again the theme of 2019 is really kind of reinvest in the business, get this place stable and invest materially, so we can get growth reignited for 2020. But the team is in really good shape. And as people see the balance sheet getting stronger, as they realize that we're becoming a free cash flow -- a very strong free cash flow generative company again, as they see the stability on the appliance side, I think people -- the energy level is up, people want to win again and we're starting to get orders.

To go back to the first part of your question, which I actually remember, which is amazing, is a lot of that appliance disruption, it wasn't just me putting the business on the market for sale, which clearly creates tremendous uncertainty, and yes, we did experience pretty high turnover, but additionally, and I'm partly to blame, we tried to take pricing in an inflationary environment and we lost a lot of listings. And we're still suffering from that, and you still see that in the numbers today. What we've done is, the team has done a great job of going back out to retail, showing a recommitment to the business, showing that the fact that we're bringing new products, we're bringing excitement and we're going to advertise behind it, and we're winning those listings. And so you'll -- hopefully, I'll be able to talk to you in June and September about a much stronger appliance business.

And your next question is from the line of Faiza Alwy.

So I guess, I wanted to first just delve a little bit deeper on the housing softness that you alluded to. Have you seen any slowdown in the remodeling market? And what's your outlook for that market? I guess, this is the first question.

Remodeling always holds up better. There's pent-up demand. There's still short supply of existing homes, so that market, we think, remains healthy. And in fact, we see growth to be blunt. So it's really -- it's the new housing side, where it's gotten me mostly concerned. And look again, since we published these numbers and since we're talking to you about the December quarter, we've seen an uptick since then. But I -- let's just see. Is it really because it's just the market disruption and the interest rate hike that caused kind of a blip that I think the whole industry saw kind of a pullback, November and December. And are we going to stabilize from here and grow? I don't know. I don't have a crystal ball. What I do know is I need to prepare for a continued softness and make contingency planning and make sure we work with our retailers to get more velocity at point-of-sale and that's what we're doing.

Okay. So what is your -- so even though the housing market has been soft and your tone seems more cautious around the market, like you've captured EBITDA guidance as is. So is there an offset? Or are you assuming that the market sort of comes back? Or was it too conservative previously?

And then within that, I guess, if you could just cover a little bit more around what you're embedding for like pricing and the raw material environment for the rest of the year? That would be helpful.

Look, we've taken pricing and that pricing was phased in and it mostly occurred, unfortunately, during the softness. And so that pricing isn't in this quarter. It got phased in a little bit in November. And so some of it, we actually got a little bit of benefit in December. So -- but no -- and I think, too, I got to make sure you're aware, 3/4 of our business is pretty stable. It's replacement cycle. It's remodel. It's multifamily. It's pretty stable, unless you had -- listen, if we have a big housing recession, that's a different story. I can't have this tone with you on this call. But the bulk of our business is pretty steady Eddie. And what we saw the pull back in is new housing. And I think you see the gross margin improved a little bit this quarter and we took some pricing. And so that's why we're able to maintain the full year outlook. And again, I think where I sit today, a week into February, I feel good about HHI putting in a solid performance. And if you looked seasonally, right, Q1 is a tiny quarter for HHI. HHI's big quarters are Q3, Q4.

Okay. If I may just ask one more question and that is you've alluded to a number of capital allocation decisions on this call. Could you talk a little bit more about that? And I'm wondering if what your thought process is around M&A? And maybe Dave, if you could talk a little bit more about how you're spending your time and how committed you are in terms of remaining with -- as CEO of Spectrum?

I was here last week. It was negative 30 degrees. And my coffee froze before it hit the floor outside of the car. But other than that things are good. Look, I spent 10 years building the company, as you know. And I think we did a pretty good job allocating capital externally and, obviously, lower interest rates helped with that and we bought good higher margin, higher barriers to entry, higher free cash flow businesses. I think clearly, I stopped buying businesses 3, 4 years ago, because I thought multiples got too high. And I think we could have done a much better job of allocating capital internally, which is what I've embarked on since April. Obviously, look, life isn't always linear, and my journey through '18 was unexpected, but I love this company. I'm committed to the company. I'm very excited about the company's future. I think we have tremendous operational opportunities to go after here that we can talk more about after we achieve them, not before. And I'm all in.

Your next question is from the line of Jim Chartier.

First on HHI. Just wanted to ask about the thought process in terms of walking away from the promotions this quarter? Did those promotions really not execute at retail? Did they get to another vendor? And then any additional promotions you might be thinking about walking away from in the future for HHI?

I'm going to let Doug take it because I've talked too much in this call.

Well, the promotions we had last year were with the big -- one of them was with a big box store, nontraditional, Dave, what would you call the category we're in here. It's in the...

Club channels.

Club channels, thank you. And that was a nonrepeating one for us. We do -- in this time period, we continue to pursue those opportunities and our brand sells well in that channel in that in and out kind of way. And the other one was related to the load in for our Amazon secure connect program a year ago and that is more of a steady business for us now rather than the initial heavy load-in there.

Great. And then great to see the improvement in the U.S. pet business. I think on the last call you talked about, in the FURminator line where you were investing behind it with more advertising and then the relaunch of the rawhide business. So I just wanted to get an update on how FURminator is doing with that relaunch and the additional advertising and rawhide as well?

Listen, the packaging there is phenomenal. And a lot of it was just getting rid of counterfeits. It's such a great product. It's the one product that actually works. It does what it says it does, but we had a ton of knock-offs and I got to take my hat off to Randy Lewis and the team down in St. Louis. We've got so many encryptions. And we register with Amazon's registry system. And so we're really able to stop the counterfeiting of that. And the new packaging -- if you haven't seen it, go look at retail. It's phenomenal packaging. It's great marketing. It's doing well. Glofish is doing great. DreamBone, SmartBones from PetMatrix is way above plan. And so look, it took us a year longer than I thought because of the recall we had in the past, but U.S. pet is back and it's back to stay and we're going, so yes.

Great. And then, so...

I also think -- look, I also think -- I'd be remiss to say, I think retail, specialty retail is realizing they need brands, they need innovation and we need to do a great job partnering with them. And I've personally been in these meetings with the CEOs of these companies and their owners. And we're back leading with brands and innovation and creating news and excitement in driving traffic, not just to the websites but back into the stores.

Great. And then any difference in terms of Europe and your U.S. and Europe businesses that would prevent Europe from kind of getting the momentum you have in the U.S.? Can you just kind of export the success you've had in the U.S. on certain product lines? Or are there differences? I know Europe has more of a pet food business.

No. To be blunt, it's harder because it's mostly product. Tetra is based in Melle in Germany and it's a bigger aquatics market there. We've had success introducing our companion animal. And obviously, we've been -- all the investments we've made, except Glofish, has been around the dog and cat companion animal space, which has higher CAGRs. The issue there on the dog and cat is small. I'm sick of talking about it on conference calls, but it's less than $100 million of revenue. It used to make us $7 million to $10 million EBITDA, became a $7 million bleed. And I'm doing my best to make that neutral this year and try to clean that up.

Your next question is from the line of Joe Altobello.

So this question, I think, has been asked a couple of times already, but I wanted to go at it one more time, I suppose. If we look at what's happened to the businesses since November, you mentioned, David, that you delayed tariff-related pricing. You've seen a little bit more weakness in HHI on a softer housing market. FX got worse. And still you kept your EBITDA guide unchanged. So I'm just curious -- I know all of these probably aren't huge in and of themselves, but they all went against you. So what got better to keep you confident in that $560 million to $580 million number?

I'll let Doug take a swing. If he doesn't get, I'll follow up.

So the impact, Joe, on tariffs is actually, I think, derisk the P&L a little bit because we had -- our assumption was we were able to price for the tariffs and price for them as they went into effect. So we've had those pricing plans ready and we left them on the shelf. And so I think the further we get into the year, the less we have to price and the less pressure we have from consumers ultimately and through our retailer partners on that particular issue. On FX, it has a greater top line -- relatively greater top line impact from a translation perspective than bottom line for us. And then finally, I'd say that we put a range out there for a reason. And we're still confident in the range.

Okay. And then secondly on pricing. Obviously, everybody in these businesses are feeling the same effects, right, of higher commodities, transportation, tariffs. What has been the competitive response in those businesses where you did take pricing?

I think in most of the cases, other people are trying to take prices too. I think we do have some examples, where competitors are not following yet, and we got to monitor that. So it's -- listen, it's a dynamic business. And there's lots of ways to do things. Do you put more in in-store, joint marketing efforts, et cetera? Do you -- it's -- mostly people are taking prices. I think you can see Clorox' numbers. They attribute taking pricing. They're restoring their entire margin structure. And it's just -- where you have the strongest brands and dominant share, it's easier to take.

Your next question is from the line of Ian Zaffino.

Just touching on the strength in pet, I guess, in the U.S. Can you just get into that a little bit more as far as -- is that the channel that improved? Or you're just lapping destocking, new innovation? Maybe just touch a little bit on that and kind of what you're seeing there and why it's been improving so well?

No, listen, Ian, thank you. Look, again, I've been talking about this like for over a year and finally it's happening. But look, the team has re-underwritten the business. I think that unit prior to Randy's team and JP taking over specifically was dependent on me to do the next acquisition. And to be blunt, now they're innovating, now they've got a new product development pipeline, now they're bringing news and excitement to the customer and to the retail customers and to the end consumers. And so it's not just FURminator, it's not just Digest-eeze and it's not just anniversary-ing the rawhide recall, it is really doing what we say we do, which is invest behind the brand, bring innovation, bring news and excitement and, yes, increase some marketing spend and genuinely partner with our retail partners. And so they're -- there I'm excited. I think they're finally starting to click. The culture is healthy. The NPD pipeline is getting better. So we got to just stay at it. We're not -- lots more to do, lots more improvements to make.

Okay. And on the Energizer stake, is there like a holding period for that? Or how do you think about that piece?

Listen, I think -- listen, those guys have been phenomenal partners. They are terrific operators and marketers. And I think they are going to be able to take Rayovac to the next level. I think both of those deals are -- the industrial logic is exceedingly strategic. I think the synergies are real. And we wanted to participate in the upside there. And I'm not saying that it's -- auto is going to just turn around overnight, but they've got iconic brands. They've got great market share and Dayton was 80% of the way there when we handed it off and they're going to take it the rest. So I look at as a way where we can partner with them, but we can also participate in the upside. I mean, when we bought auto, it was 130-ish in EBITDA. We got it to 145 and then 150 by the time we were -- before we did the 5 to 1 consolidation, which really derailed the earnings power of the company, but I'm hoping they can chip away with that and get that back. I think we hold the stock for at least a year. We're happy to be long-term holders and participating in the upside there. I have the utmost respect for their team, for Alan, for Mark, and we're their biggest fans.

Your next question is from the line of Sam Reid.

Wanted to drill down a bit more on personal care here. And I've actually got a two-part question. So first, could you kind of give us a sense as to how big e-comm is as a proportion of your total personal care sales? And then second, just personal care e-comm sales in the U.S. specifically, how did that growth trend in fiscal 2018? And could you kind of give us a sense as to how it might have trended in 1Q versus that 2018 growth?

Yes, e-com is representing around 17%, 18% of that business and continues to grow. I think -- look, I think we were kind of the first mover there, to be honest. And I think we did a very, very good job 3, 4 years ago, getting out there, getting the ratings, getting the growth. I think our competition kind of caught on to that. And it's kind of made it more expensive to play, and we're not getting the yield we used to get. And so that's another area that I'm going to be investing in to not only grow our business but make it tougher on our competitors. And look, I think on the personal care side, to be blunt, that's where we suffered the most delistings in the period a year ago. So that's why we're comp -- having such tough comps right now. We need to regain those listings and we have in a lot of areas. Our actual home appliance business EBITDA actually grew this quarter by a couple of million bucks. So home appliance is already kind of getting stabilized, but we really got to fix personal care. When I say personal care, I mean personal care U.S. Personal care Europe has done a phenomenal job, and that's why we did this partnership with Man U. It's global, so we do expect to benefit in the U.S. But Remington is #1 over there and has tremendous growth trajectory. Did I get your question?

You did, you did. And if I could sneak a follow-up question in here as well. It's good to hear. You're upbeat on Home & Garden. That said, I just kind of wanted to get a sense as to how your inventories here look at retail in this segment specifically? And how you think the inventory cycle at retail will play out over the course of this year in those segments?

Doug, go ahead.

Yes. We think we exited the last fiscal year in good shape in those, and you know that's a very seasonal business. So we're, right now, shipping -- beginning to ship the season and expect that with our new listing wins that we will have really nice representation at shelf where our -- where most of our -- a lot other customers anyway buy these products. And we added capacity in both liquids and aerosols over the last couple of years, so we have a better opportunity to manage our inventory positions as well and improve working capital there as well as being able to respond quickly to demand changes. So things are looking good for our season.

And then listen, to follow on that, Home & Garden, and I sat down with Randy back in the spring and in the summer, and I said, "Look, we have tremendous brands. We don't have glyphosate in the product and we've got a great story to tell. And so this year, again, part of our investment in marketing and brand support. We're putting millions of dollars for the first time behind Spectracide. And we're partnering with retailers and it's caused us to gain share and listings, and we're in it to win it. And -- so look, yes, weather has to cooperate, but I'm very bullish on Home & Garden. We got a great team there. We got great products. We got great innovation. We got great pricing and we're going to bring more value to our retailers by partnering on marketing initiative there. And I think the payback is going to be very fast.

Your final question is from the line of Karru Martinson.

Just on the old adage that you guys always offered value for less. I mean, I'm hearing a lot of partnering with retailers, advertising, brand support, stepping up behind them...

It's a new Spectrum brand, yes.

Absolutely. So how should we think about that spend as we go forward?

No. Look, that's a very good question. And look, I'll just take -- I'll take one example and I won't go into too much detail, but I expected one of the -- one piece of the program is about $2.5 million spend. I think it will result in a $20 million, $30 million pick-up of new revenue. And based on contribution margins, that will pay back faster than a year. And obviously, we're trying to allocate tens of millions of dollars in that same fashion. We're not all the way there yet. We're only a quarter into the year and it's a marathon, not a sprint. But I've also put in a new -- I've got an entire new analytics group, working with me on looking at the return on the spend and making sure we're accountable on it, where I don't think that was done in the past. So listen, value doesn't mean cheap. You can have great value with a Kwikset set product, with a tremendous value through our Smartkey technology, through Bluetooth, through Wi-Fi and it can be a $100, $200 price point. I think the more and more and more thing, we just tried to be too many things to too many people. I want to be an inch wide and a mile deep. I want laser focus. And yes, we're going to be investing in innovation. We're going to be investing behind the brands, and we're going to be communicating to our customers. And we didn't do that in the past, but that's definitely what we're going to do in the future. We're creating a faster, smarter, stronger company.

Okay. And then just last -- just so we're clear, the 3.5x leverage target, that is a gross leverage target from the 4.6x gross today?

No, because look, I don't want to pigeon-hole us. If you think about -- if I run the math over the next 6 to 9 months and I've got $1 billion in a checking account and undrawn revolver of $800 million, that's probably too much liquidity. And so if you look at the liability side, yes, we paid down $2.2 billion and that's going to generate a lot of free cash flow going forward, but is there more to do, right? And are there other capital allocation decisions to be made? And so we just -- listen, we've been moving at a breakneck pace. I think kind of we've got things stable. I feel good about the outlook. This is -- again, this is the year of stability and reinvestment in the business to position us to grow in 2020, but I want a very healthy and liquid balance sheet. I've said on multiple calls, I want to run the company more conservatively from a P&L and a balance sheet standpoint. And we're going to take our time, but I think give us the next 30, 60 days to look at market conditions. I mean, listen, it wasn't until -- I mean, 3, 4 weeks ago, I could have brought back bonds at a discount, now I can't. You know me, my background. I want to maximize the return for shareholders again. So let's look at the environment around us. Let's reassess where things are. We'll make some decisions and we'll communicate them when we do.

Thank you, Karru. And with that, we have reached the top of the hour. So we will conclude our conference call. I certainly want to thank both David and Doug. And on behalf of, of all of us here at Spectrum Brands, thank you all for participating in our fiscal 2019 first quarter earnings call. Have a good day. Thank you.

This concludes today's earnings conference call. Thank you for your participation. You may now disconnect.