Spectrum Brands Holdings Inc

NYSE:SPB

Earnings Call Transcript 2018-Q1

[Operator]

Good morning ladies and gentlemen. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2018 First Quarter Earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star the number one on your telephone keypad. Should anyone need assistance at any time during this conference, please press star then zero and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, February 8. Thank you.

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

[David Prichard, Vice President, Investor Relations]

Thank you, Jamie, and good morning everybody. Welcome to Spectrum Brands Holdings fiscal 2018 first quarter earnings conference call and webcast. I’m Dave Prichard, Vice President of Investor Relations for Spectrum Brands and I’ll be your moderator for our call today.

To help you follow along with our comments, we have placed a slide presentation on the event calendar page in the Investor Relations section of our website at spectrumbrands.com. This document will remain there following our call.

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

If we turn to Slides 3 and 4, you’ll note that our comments today do include forward-looking statements, including out outlook for fiscal 2018 and beyond. These statements are based upon management’s current expectations, projections and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 8, 2018 and our most recent SEC filings and Spectrum Brands Holdings most recent 10-K. We assume no obligation to update any forward-looking statement.

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

With that, I am now pleased to turn the call over to our Chief Executive Officer, Andreas Rouvé.

[Andreas Rouvé, Chief Executive Officer]

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

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

In pet, our sales were reduced as expected from our continuing and planned exit of the European dog and cat food customer tolling agreement, which had an impact of approximately $8.4 million or 1.4% in the first quarter and is expected to total about $24 million for the full year. Our pet business was also impacted in the U.S. from soft demand in the pet specialty channel and some supply challenges out of our Latin American facilities after our rawhide product recall. However, we saw strong growth in our acquired business and were successful to replace some of our rawhide products with rawhide-free alternatives.

Sales in home and garden and Global Auto Care were slightly down in the quarter as retailers delayed the order intake and reduced their inventories in the low season.

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

Our Q1 reported adjusted EBITDA improved by 0.5% year-over-year. Solid contributions from our PetMatrix and GloFish acquisitions and our continued cost improvement were offset by rising commodity costs and a negative currency impact on our input costs. We also faced some unfavorable price mix impact as hardware and home improvement gained a major private label contract and Global Auto Care had some strong promotions in the holiday season with appearance products while retailers delayed the intake of the seasonal AC products. Please let me remind that you Q1 is for our continuing business by far our smallest quarter of the year and that we generated in fiscal 2017 only 16% of our annual EBITDA in the first quarter.

Turning to Slide 7, we have made major progress in our key strategic initiatives. The U.S. footprint consolidation of our Auto Care division in Dayton, Ohio is now complete, which is important as we head into the peak spring and summer period. Also, the consolidation of our hardware and home improvement distribution in Kansas is moving forward toward completion as we exited our west coast distribution center in November and will exit our east coast distribution center in February. Also, our European project to consolidate our pet distribution centers in our Coevorden facility will be completed early April. While these projects have caused shipments delays and lower efficiencies during the transition and start-up phase, we will see the benefits of cost savings, lower working capital, and improved service levels later this year and beyond.

We remain also focused on accelerating our organic growth. To support this objective, we announced on our last call the initiative called Project Alpha, where we make higher investment into new product development and digital marketing to launch more innovative products and expand into adjacent categories. An early example is the organic expansion with Armor All into the adjacent automotive air freshener category. Our customers have responded in a very favorable way to our new portfolio and we gained already many listings in all key channels.

Another project is the expansion of our pet division with Nature’s Miracle into more categories and channels, as well as a major re-launch is IAMS and Eukanuba in Europe. In a first step, these initiatives require start-up expenses but we are excited about the additional growth opportunities.

The complementary initiative in the early stages of implementation is Project Ignite, which aims to redirect our resources and spending to our best growth opportunities. We expect Project Ignite to partly fund [indiscernible] made through Project Alpha in fiscal 2018 as we will start to see the benefits in the second half of 2018. Accordingly, we expect stronger performance in our continuing operations in the out quarters. We also have reaffirmed today our fiscal 2018 adjusted free cash flow guidance of a record $620 million to $640 million versus $587 million in fiscal 2017, which includes our discontinued GBA segment.

Turning to Slide 8, January was a month of transformational developments for spectrum brands. We announced a definitive agreement on January 16 to sell our global batteries and lighting business to Energizer Holdings for $2 billion in cash in a transaction expected to close before the end of calendar 2018. This was a significant step in our announced strategy to reshape Spectrum Brands into a faster growing, higher margin and more focused consumer brands company. We are in the early stages of marketing our personal care and small appliance business as the other key component of our intention to divest our global batteries and appliance segment in 2018, and we are in active discussions with interested parties. We plan to use the net proceeds from these divestitures to reduce debt, repurchase shares, but also increase our investment in organic growth initiatives as well as bolt-on acquisitions in our remaining business of hardware and home improvement, Global Auto Care, pet, home and garden. By refocusing in this way, we believe we will strengthen our business and drive long-term growth and shareholder value.

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

[Doug Martin]

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

Now turning to Slide 10, let’s review Q1 results from continuing operations, beginning with net sales. First quarter reported net sales of $646.5 million increased 7.3% versus last year. Excluding the impact of $7.5 million of favorable FX and acquisition sales of $24.8 million, organic net sales grew 2%. This increase included the planned negative impact of the exit of the European pet food tolling agreement of approximately $8.4 million or 1.4%. HHI delivered a record first quarter top line performance partially driven by reducing the backlog associated with the continued ramp-up of the new Kansas distribution center. Reported gross margin of 37.3% decreased 240 basis points from 39.7% last year primarily due to unfavorable mix, input cost pressure, the negative impact of the pet rawhide recall, and operating start-up and efficiencies primarily in HHHI’s U.S. distribution consolidation project

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

On a reported basis, Q1 diluted EPS from continuing operations of $2.07 increased compared to $0.21 last year primarily due to lower interest expense and a net income tax benefit in Q1 attributable to the recently enacted U.S. tax reform. Adjusted EPS from continuing operations of $0.38 increased 8.6% versus $0.35 last year primarily due to the change in the normalized effective tax to a blended annual rate of 24.5% from 35% last year, again due to the changes in U.S. corporate tax law, and we will use this rate for the balance of the fiscal year.

Turning to Slide 11, we report interest expense from continuing operations in the first quarter of fiscal 2018 of $38.6 million, decreased $4.4 million from last year. Cash interest payments of $57.5 million were $13 million higher than last year driven by the timing of payments on our euro-denominated notes. Cash taxes of $10 million were comparable to 2017, and during the quarter we recorded a net tax benefit of $127.9 million related to recently enacted U.S. tax law changes.

Depreciation, amortization and share-based compensation from continuing operations were $38.9 million, essentially flat to last year. Cash payments for acquisition and integration and restructuring and related charges for Q1 were $7 million and $25 million respectively versus $4 million and $3 million respectively last year. Restructuring charge increases were primarily the result of the operating inefficiencies in the HHI distribution center consolidation project and the continuing of the U.S. pet rawhide recall initiated last June.

Turning to business unit results from continuing operations, beginning with Slide 12 and Global Auto Care, Q1 reported net sales of $68.9 million decreased 0.9%. Excluding favorable FX of $0.69 million, organic net sales decreased 1.7%. International growth, especially in Europe, was more than offset by lower U.S. revenues driven primarily by the timing of [indiscernible] shipments. Reported adjusted EBITDA decreased 25.3% to $14.8 million with a margin decline of 700 basis points to 21.5%, driven by lower volumes, unfavorable product mix, and operating inefficiencies. As a reminder, Q1 is typically about 15% or less of GAC’s full year and not a meaningful indicator of performance for the balance of the year.

As Global Auto Care moves into its much larger spring and summer periods, its focus is on accelerating organic growth by share gains, adjacency expansions in the U.S., and an improved vitality rate with larger investments behind new product launches and faster international growth, as we saw in Q1. GAC expects further benefits from the second year of its Armor All Ultrashine Wash and Wax Wipes, which were successfully launched in 2017, and the introduction of a full line of Armor All automotive air fresheners in the U.S. market. The full line includes vent clips and sticks, gel cans, fabric re-freshener, paper cards, and odor eliminator aerosols. This is one of our 2018 Project Alpha programs and we are excited by its acceptance in the trade and its overall prospects.

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

Turning to Slide 13, hardware and home improvement reported record Q1 net sales of $325.9 million, an increase of 12.8% versus last year. This outperformance was driven once again by strong growth in residential security and plumbing in the U.S. and Canada. Excluding favorable FX of $2.1 million, organic sales increased 12.1%. Reported adjusted EBITDA growth was 1.4% to $60 million due to higher volumes, while margins fell 210 basis points to 18.4%. Impacting HHI profitability in the quarter were product mix, higher commodity costs and FX. Starting this quarter, HHI is pricing to help offset inflation.

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

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

Now to global pet, which is Slide 14. Global Pet continues its transition to a stronger branded and higher margin business in 2018. Q1 reported net sale of $202.4 million increased 4.2% as a result of $24.8 million of revenue from the PetMatrix and GloFish acquisitions completed last spring. Excluding acquisition revenues and favorable FX of $4.8 million, organic net sales decreased 11%. Negatively impacting revenues was a decline in European dog and cat food sales of $8.4 million or 4.3% from the planned exit of a customer tolling agreement. Reported adjusted EBITDA increased 11.1% to $34.1 million due to the acquisitions with a 100 basis point margin improvement, while organic adjusted EBITDA of $25 million declined 18.6% excluding the impact of acquisitions of $8.7 million and favorable FX of $0.4 million.

Organic net sales declined both in the U.S. and Europe, and while ecommerce growth of 39% in Q1 was very strong in the U.S., companion animal sales were adversely impacted by the rawhide dog chew recall as well as continued sluggish store traffic and continuing inventory adjustments in certain channels. Pet top and bottom line results will continue to be boosted by the full-year impact of the PetMatrix and GloFish acquisitions, which have both been fully integrated, are performing ahead of expectations, and are margin enhancing to the legacy pet business.

Pet is introducing innovation across grooming, health aides, rawhide chews, and further expansion of our Nature’s Miracle brand in the non-pet channels, which is also one of our Project Alpha initiatives this year. In Europe, pet is launching innovation under the IAMS and Eukanuba brands as well as for Tetra. We now expect the full-year impact of the exit of the European pet food customer tolling agreement to be approximately $24 million and we believe that the pet recall impacts will lessen as the three effective South American plants return to full production levels.

Moving to home and garden, which is Slide 15, home and garden reported net sales of $39.3 million fell 1%. Adjusted EBITDA of $5.4 million decreased 5.3%, and reported margin of 11% fell 40 basis points primarily due to reduced volumes in the division’s seasonally smallest quarter, typically comprising about 10% of full-year results. The slightly lower sales were timing related, and home and garden continues to plan for above-category growth in fiscal 2018 with quarterly phasing reverting to more traditional historic pacing based upon normal spring and summer weather pattern expectations and driven by innovation in spring, several new Hot Shot products, and a new Cutter Backwoods high DEET aerosol repellant.

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

Turning to Slide 17 and our 2018 guidance, we expect reported net sales from continuing operations to grow above category rates for most categories, including the anticipated modest positive impact from FX based on current rates. We expect to deliver record adjusted free cash flow between $620 million and $640 million, and the following estimated ranges include discontinued operations: full year interest expense is expected to be between $210 million and $220 million, including approximately $15 million of non-cash items; cash interest payments are expected to be between $185 million and $195 million; depreciation and amortization is expected to be between $245 million and $255 million for 2018, including approximately $50 million for amortization of stock-based compensation.

Our 2018 effective tax rate is expected to be between 25% and 30% prior to the impact of U.S. tax law changes and any sales of the GBA segment. Note that for adjusted earnings, we are now using a blended rate of 24.5% versus 35% in prior years.

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

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

Thank you, and now we’ll turn it back to Dave for Q&A.

[David Prichard, Vice President, Investor Relations]

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

[Operator]

[Operator instructions]

Your first question comes from Olivia Tong with BoA Merrill Lynch. Your line is open.

[Olivia Tong, Bank of America Merrill Lynch]

Thanks, good morning. Wanted to concentrate first on sales. Excluding obviously the GBA business, what do you think your aggregate category growth rate is now? HHI looked great, but obviously the divisions were a bit light relative to our expectations, so first, was there any timing issue, or what else could have impacted those results?

Then on the margins, how do the margins of some of the recent new products that you’ve launched compare to the existing line-up, because particularly in HHI, that new smartlock sounds pretty innovative, but wondering how margins compare to the base. Thanks.

[Andreas Rouvé, Chief Executive Officer]

Yes, good morning Olivia, this is Andreas. Coming back to your first question on the sales, the category growth, I think we continue to benefit from a kind of strong growth in the U.S. housing market which will continue to drive, I would say in a range of about 5% category growth for HHI. Of course, there will be differences. We are very strong in the electronic door segment which is growing faster than that, so we believe that we can continue to grow that fast. Our strong growth in the quarter in HHI, which was above 10%, is partly driven by the fact that we have gained an additional private label customer which of course did help us pull up our total sales number, but it had some negative impact on the price mix impact .

Now moving onto the next business, which is not as seasonal, which is the pet business, here again we should see that there are different sub-categories. Some categories, like for instance aquatics, are probably flattish, slightly down in some markets, slightly increasing, but also here we are making good progress in growing faster than the category because we are launching more equipment, getting new consumers into the hobby, so we are very active to try to promote fish ownership and get new entrants into the category.

The second category in pet is our companion, and there we continue to see, I would say, solid single-digit or low single-digit category growth. We face here the headwinds, a, of our recall impact while now all our factories are back up and running. It took them until about now the early part of February to be up to 100% of their capacity, so all the factories are now again back 100% at capacity, but it still takes us some time to fill up our supply chain and therefore we will still have some small impact in our second quarter from the rawhide recall. But then again, we should continue to see strong solid growth as we recapture this space.

Then if we move onto the next category, which is home and garden, home and garden, as Doug mentioned earlier, this is really now the low season, and this is coupled with the fact that all retailers - and this is really not only the Wal-Marts of the world but all major retailers - are focusing on inventory reduction, especially during the holiday season where they are giving more space to those seasonal products in the holiday time frame, so therefore we don’t expect that this slight decline which we had is any meaningful indication for the full year. We expect the categories to grow again in the low single digit range. We had last year the negative impact that the trade wars heavily stock with insect repellants from the Zika scare in 2016, and there we see a normalization in 2018, so we expect actually a slight above category growth in home and garden.

In Auto Care, also we need to take a look at the different categories in appearance products and also performance. We see slight single-digit growth - again, this is driven basically from the increased awareness of consumers, so that should continue. Also AC, we believe the market will grow in the low single digits because more consumers are becoming aware of this self-service solution, so we believe that’s continuing to grow. We believe again we can grow faster than the category as we continue our international rollout leveraging our international infrastructure to expand into more countries with those product portfolios, and we have seen already some first nice success in Europe in the quarter, and we believe that this is going to continue. The small pushback in the first quarter on Auto Care was really again retailers reducing their inventory of the seasonal air conditioning products in the low season, where again they wanted to create more space.

So sorry for that lengthy reply, but I tried to cover all the different categories.

Now moving to your second question on the margins, I just need to look at my colleagues again. Can you help me again, what was your precise question again?

[Olivia Tong, Bank of America Merrill Lynch]

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

[Andreas Rouvé, Chief Executive Officer]

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

[Olivia Tong, Bank of America Merrill Lynch]

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

[Andreas Rouvé, Chief Executive Officer]

Well first of all, we have certain obligations in the contract how we cooperate to get the regulatory approval. Overall, we believe that there is a very high probability that we are going to receive approval. I think if you take a step back and look at the global battery market, there is a tendency across the globe of increased private label, and again me as a German, I look at the German market - if you go from a volume basis, private labels approach 70 to 80% of the sold batteries. So therefore, I think looking only at the brands, it’s a little bit misleading in the category.

But again, we will work together with the Energizer law firms to gain the regulatory approvals, and we believe that’s a very good probability of success.

[Doug Martin]

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

[Olivia Tong, Bank of America Merrill Lynch]

Thanks very much.

[Operator]

Your next question comes from Bob Labick with CJS Securities. Your line is open.

[Bob Labick, CJS Securities]

Good morning.

[Andreas Rouvé, Chief Executive Officer]

Hi Bob.

[Bob Labick, CJS Securities]

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

[Andreas Rouvé, Chief Executive Officer]

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

[Bob Labick, CJS Securities]

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

[Doug Martin]

Bob, this is Doug. I think we will continue to think about capital allocation as we historically have. We want to put our balance sheet to the best use possible, and if that means building out and focusing on the remaining businesses, we’ll do that as we’ve continued to do that, and you saw that within the last year as we added on to the pet companion animal part of our business, and also with our GloFish acquisition. So there’s a lot of opportunity for us to continue to do that.

If there were another vertical that was interesting to us and fit nicely with us, had the right growth and cash flow expectations for us, we would certainly give that consideration as well. We’re open for capital allocation business, but we remain, as you know, very, very disciplined, so we’d have to find the right opportunities.

[Bob Labick, CJS Securities]

Okay, great. Then while all this is going on, are you precluded from buying back stock? I know that’s part of the opportunity once things are concluded. Currently, could you discuss that?

[Doug Martin]

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

[Bob Labick, CJS Securities]

Okay, great. Thanks very much.

[Doug Martin]

Thank you.

[Operator]

Your next question comes from Faiza Alwy with Deutsche Bank. Your line is open.

[Faiza Alwy, Deutsche Bank]

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

[Doug Martin]

On the first question, I’m not going to break out separately our expectations for cash flow on the legacy business or the continuing operations business versus the divested businesses, only because we don’t know the timing of the divestitures, and as you know, our cash flow across the entire business is fairly seasonal, so to try to get into that kind of detail and predicted expectations isn’t probably worth the effort. Now, you’ll get some indication of what the businesses that are in discontinued operations, how they’re performing when the 10-Q is filed, but there are also unusual allocation rules for interest expense and other things, so we’re just going to commit to that guidance, re-commit to that guidance that we gave earlier in the year.

You’re right - we have spent a little more in--or are expecting to have a little more cash flow hit from tax and from restructuring, modest amounts, maybe $15 million for both of them in the year, and we’ll manage that within the context of other working capital initiatives, also other parts of our cash flow generation machine here. So it is not a specific indication of EBITDA performance changes from what our internal expectations are.

[Faiza Alwy, Deutsche Bank]

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

[Doug Martin]

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

[Faiza Alwy, Deutsche Bank]

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

[Andreas Rouvé, Chief Executive Officer]

Actually, we believe that pet is one of the divisions with the strongest growth opportunities. I mentioned that earlier, for instance, we are going to re-launch our IAMS and Eukanuba business brands this summer, and I am joining the call from our Holland factory, Coevorden, where again we just went through the entire program. When we acquired the business from P&G, all the MPD staffing, all those roles were actually at the corporate level and did not join Spectrum Brands, so we basically took over the business without new product development staff, so we had to invest into those resources first. We had the negative impact of the mass exit, so therefore we--but we are going to be now at this turning point.

Another element of our strategy where we are really going to follow the same strategy as in batteries, and where we were very successful, is to load our factories with private labels because again having a high factory load gives us lower cost per unit, which makes us longer term competitive, and here we have gained now the first two private label contracts in the dog and cat food business which are going to materialize in this fiscal year.

So we believe that our dog and cat food business, which we acquired three years ago and which was really year-over-year declining business, it has come to the point where it starts to grow, and therefore we are extremely positive about that business.

The second element is also that we were and we still are very strong in the pet specialty channel. There were certain products in our portfolio which were very strong, like Nature’s Miracle - strong brand awareness, but we did not utilize to the full extent those strong brands, so over the last two years again we have invested resources to upgrade the program, to expand into adjacencies, but also to prepare a wider portfolio that we can serve the different channels better with this strong brand and also, as Doug mentioned earlier, we are actually taking this strong brand and going to expand, for instance into the automotive channel where we are going to offer Nature’s Miracle to clean up the pet mess in the car. So therefore, we also believe that we have very nice momentum in those categories.

The third element I mentioned earlier, in the aquatics category, there really the market is in a slight decline or flattish, and here we have started to invest since two years to create new demand, getting children, new consumers into the hobby, and also here we are seeing first nice success here in Europe where we are gaining new customers, new listings, and that is also on a positive trend.

So therefore we firmly believe that pet is going to be one of our strongest growing categories going forward.

[Faiza Alwy, Deutsche Bank]

Great, thank you.

[Operator]

Your next question comes from Kevin Grundy with Jefferies. Your line is open.

[Kevin Grundy, Jefferies]

Thanks, good morning guys. I wanted to pick up again on the margin piece, obviously a lot of pressure across your segments in the quarter. Doug, can you help us understand a bit how much of this is specific to the quarter versus how much you’ll have to contend with? It would seem like commodities, that will continue to be a headwind, perhaps mix continues to be a headwind. Maybe you can talk about some of the major areas - commodities, pricing, mix, productivity savings, and how we should think about that.

Then Andreas, within that, the topic of pricing is of great interest now in the space and in certain categories it’s become very difficult to take pricing, and maybe less so elsewhere. You sounded pretty optimistic on your ability in pricing in some of your categories. It would be great to get an update there on how those conversations are going with retailers at this point, your confidence in your ability to take pricing, and how much of that is included in your guidance for the year, and then I have a follow-up. Thank you.

[Doug Martin]

You have a follow-up after all that, Kevin? Good. Let me take a couple of those on. We do have broad-based commodity pressure this year that we haven’t seen in a number of years, and you’re aware of that - it’s everywhere. For us specifically, it’s a little bit in zinc in our HHI business and some other input costs into that business. Distribution across our portfolio is a little bit of incremental pressure this year.

From a mix perspective, I think Andreas explained that a little bit. We had a couple of thing happening in our portfolio in home and garden and Global Auto Care in the first quarter. There’s little opportunity to leverage anything there because it’s such a small part of their year - 15% in the case of Global Auto Care and 10% in the case of home and garden. So I’m not concerned about leveraging our base cost.

Then in HHI, as Andreas also mentioned, we are in the process of--in the first year of rolling out a pretty significant private label win that is having a bit of a mix impact. From a reported basis, the DC and pet recalls are a bit of a drag in HHI and also to a lesser degree in Global Auto Care in the quarter, and then the recall of course in pet - now, that’s reported. So overall, there is some mix impacting us in the quarter, and we expect to have improved margin across the business, across the continuing business going forward.

Productivity, as you know, we are very focused on productivity as a company. It’s a core attribute, it’s in the core DNA of our businesses, and our businesses are driving that day-in and day-out, so we do expect to be able to offset at least some of these input cost pressures with productivity.

With that, I’ll pass it back to Andreas for your questions on pricing, which would be the other element we’re using to balance [indiscernible].

[Andreas Rouvé, Chief Executive Officer]

Again, I think a little bit simplified - you know, the pricing topic is really decisive. If it becomes a win-lose discussion, where if we want to take price the retailer margin goes down, I fully agree with you it’s a no-go, so therefore we will not be successful with that. So therefore, what our key approach is that we are trying to make it a win-win, where again we pass a price increase to the retailer and the retailer can take their consumer prices up, so that at the end of the day we pass on the inflation coming from commodities onto the consumer.

What we typically also try to combine with price increases are new product launches, product upgrades, be it in packaging modifications where we have combined packagers, so therefore we are trying to do that in a kind of very intelligent way where it is becoming a win-win for our retail partners and us, and second also even for the consumer, he’s getting at the end of the day also a better product for the deal.

[Kevin Grundy, Jefferies]

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

[Andreas Rouvé, Chief Executive Officer]

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

[Kevin Grundy, Jefferies]

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

[Andreas Rouvé, Chief Executive Officer]

We continue to run the business as if we own it, and therefore we are launching great innovation. The best example is we are just in the middle of launching a new generation of hearing aid batteries which is the best performing hearing aid battery on the market. We are investing into new packaging facilities, that means we continue to invest in the business. I mentioned earlier I’m here right now in Europe, we had yesterday our European business review for batteries. We continue to win new customers. We are growing year-over-year in Europe with our battery business, so very nice momentum.

The one point where again--you know, to come back to your question on morale, where we again explained very openly to our team is that Varta joined back in 2002 Rayovac. I joined the Spectrum Brands in 2002 as part of an acquisition, and the Varta battery business probably would not exist any longer if we would not have merged together with Rayovac to become a bigger, stronger global player, and therefore we believe that also in the long term, it is going to strengthen the battery portfolio, and by combining Energizer and Rayovac-slash-Varta’s strengths, so therefore we believe that it’s long term beneficial also for the employees of the Spectrum Brands battery business.

[Kevin Grundy, Jefferies]

Okay, thank you for your time. Good luck, guys.

[Andreas Rouvé, Chief Executive Officer]

Thanks Kevin.

[Operator]

Your next question comes from Jason Gere with Keybanc Capital Markets. Your line is open.

[Jason Gere, Keybanc]

I apologize - I was a little late on the call, just a busy earnings day. Did you guys talk about the plan-o-gram resets in the continuing ops in terms of the discussions you’re getting, any kind of shelf space changes? In a world of destocking, it seems to impact everybody from quarter to quarter. I’m just wondering if you can talk a little bit about that, and then conversely the ecommerce business, the great growth that you got, what businesses do you still think are underpenetrated, you think there’s more room to go, and if you can maybe flesh out that as well, thank you.

[Andreas Rouvé, Chief Executive Officer]

This is Andreas again. Let me first cover your question on the plan-o-gram. You’re correct that there is a tendency in a lot of retailers for simplicity, getting a kind of cleaner shelf with fewer offerings, but we firmly believe at the end of the day, it’s decisive how much percent of the shelf we have, so therefore we do have in some categories really the one or other SKU where we are losing a facing, but in percent of the shelf space we continue to win, be it in pet, be it in auto care where we are seeing this tendency coming up quite strong. So therefore yes, there is a kind of tendency for a clean shelf initiative, but so far we are not seeing that as a major headwind for us.

Now, the second question on the ecommerce, of course if you look at the different categories, there are categories like pet in hardware and home improvement where the online share of business sold is higher than in other categories, as Auto Care. We are investing in all our business into more staff, into more digital marketing to drive it, because we see that as a trend in the consumer behaving, that they search for information and wherever they want to buy it, but then also very often they buy it online. So we have added, for instance in Auto Care, when we acquired the business a couple of years ago, they had zero dedicated people focusing on ecommerce. We have now in the meantime a dedicated team focusing on it, so we expect that we can continue to grow in all of our businesses.

[Jason Gere, Keybanc]

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

[Doug Martin]

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

[Jason Gere, Keybanc]

No more, that’s it? Okay, I’ll take it. Thanks guys.

[Doug Martin]

620 to 640, that’s our number.

[David Prichard, Vice President, Investor Relations]

Operator, next question, please.

[Operator]

Your next question comes from Sam Reid with Wells Fargo. Your line is open.

[Sam Reid, Wells Fargo]

Thanks guys for taking my question. I had a quick question on Project Alpha specifically. Some of the investment spending that you guys earmarked last quarter for that initiative, just curious as to how much of that was directed to global batteries and appliances, and are you still looking to make the same level of investment you guys talked to last quarter or have you modified your investment plans given some of the changes in your business?

[Andreas Rouvé, Chief Executive Officer]

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

[Sam Reid, Wells Fargo]

Got you, and then one follow-up question. Could you help reframe your longer term EBITDA margin expectations? I know you guys have historically indicated that you expect EBITDA margin expansion across your business, but curious how that changes now that the global batteries and appliances business is no longer a part of your core mix. Thanks.

[Doug Martin]

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

[Sam Reid, Wells Fargo]

Awesome, thanks so much.

[Operator]

Your next question comes from Joe Altobello with Raymond James. Your line is open.

[Joe Altobello, Raymond James]

Thanks, hey guys. Good morning. First, I want to go back quickly to cash flow for a second. What’s the expected impact from changes in working capital on your cash flow target for this year?

[Doug Martin]

Joe, you’ve been talking to Jason. We don’t go into that level of detail, and I don’t expect I will on this call either.

[Joe Altobello, Raymond James]

Okay, fair enough.

[Doug Martin]

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

[Joe Altobello, Raymond James]

Okay, because that’s where I was trying to go with that, is how much you have left in the tank, I guess, with regard to working capital improvements. It sounds like there is a lot.

[Doug Martin]

We’re never satisfied. It’s a lot like productivity for us - we’re never satisfied.

[Joe Altobello, Raymond James]

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

[Andreas Rouvé, Chief Executive Officer]

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

[Joe Altobello, Raymond James]

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

[Doug Martin]

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

[Joe Altobello, Raymond James]

Okay, great. Thank you, guys.

[David Prichard, Vice President, Investor Relations]

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

[Operator]

Your next question comes from Ian Zaffino with Oppenheimer. Your line is open.

[Ian Zaffino, Oppenheimer]

Hi, great. A couple questions. On the battery sale, what’s your anticipated proceeds, or what do you expect to get in the bank?

[Doug Martin]

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

[Ian Zaffino, Oppenheimer]

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

[Doug Martin]

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

[Ian Zaffino, Oppenheimer]

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

[Doug Martin]

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

[Ian Zaffino, Oppenheimer]

Okay. Then just more of a nuanced question, is free cash flow guidance you maintained, then there were a couple changes in the guidance of restructuring. There is a lot of charges that you’ve changed since the last time you issued guidance, and that would imply an EBITDA guidance increase. Is that actually the case, or is there just some noise in there and the way to think about EBITDA guidance, or implied EBITDA guidance is unchanged?

[Doug Martin]

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

[Ian Zaffino, Oppenheimer]

Okay, so meaning that as you lean into the working capital, you’ll see better than expected free cash flow, or that would--maybe to offset some EBITDA [indiscernible]?

[Doug Martin]

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

[Ian Zaffino, Oppenheimer]

Got it, okay. All right, perfect. Thank you very much.

[Doug Martin]

All right, thank you.

[David Prichard, Vice President, Investor Relations]

Thank you. With that, we have reached the top of the hour, so we’ll proceed to conclude our conference call. I certainly want to thank both Andreas and Doug, and from all of us here at Spectrum Brands, we thank you for participating in our fiscal 2018 first quarter earnings call. Have a good day. Thank you.

[Operator]

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