Spectrum Brands Holdings Inc

NYSE:SPB

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and welcome to the Q4 and Full-Year 2022 Spectrum Brands Holdings’ Earnings Conference Call.

I would now like to turn the call over to Faisal Qadir. You may begin.

[Faisal Qadir, VP, Strategic Finance & Enterprise Reporting]

Thank you. Good morning, and welcome to Spectrum Brands Holdings’ Q4 and Full-Year 2022 Earnings Conference Call and Webcast. I am Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we've placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at www.spectrumbrands.com. The document will remain there following our call.

Starting with Slide 2 of the presentation. Our call will be led by David Maura, our Chairman and Chief Executive Officer; and Jeremy Smeltser, Chief Financial Officer. After closing remarks, we will conduct the Q&A.

Turning to Slides 3 and 4. Our comments today include forward-looking statements, which 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 November 18, 2022 and our most recent SEC filings and Spectrum Brands Holdings' most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement.

Also, please note 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. Finally, we encourage you to listen to our remarks today alongside with reading Spectrum Brand’s press release and 8-K issued today in our annual reports on Form 10-K once it is filed with the SEC.

Now, I'll turn the call over to David.

[David Maura, Executive Chairman & CEO]

Hey. Thanks, Faisal. Good morning, everybody. We thank you for joining us today for our fourth quarter fiscal ‘22 conference call. I'm going to kick the call off today with a discussion on the dynamic environment we are operating in, and I'm going to talk about our company's operating and strategic direction. Jeremy is then going to provide a more detailed financial and operational update with a discussion of our specific business unit results.

If I could turn your attention to Slide 6. We entered fiscal '22 with very favorable economic conditions, driven by factors such as high COVID-19 demand in and around the home, low interest rates and abundant capital, low unemployment and high consumer confidence spurred demand for our products. We planned for a growth year based on strong consumer demand and retailers ordering high amounts of inventory as they anticipated high sell-through rates.

We anticipated headwinds from input cost inflation including historically high ocean freight costs, but had planned for price increases to offset these margin pressures. Unfortunately, we faced additional headwinds as the year went on with supply chains around the globe becoming more inefficient and supply chain costs also increasing during this time with port slowdowns and high inventory throughput, the system causing demurrage, detention and distribution costs to spike.

Then the macroeconomic environment started to change during late in the second quarter in Europe, as the Russia and Ukraine war negatively impacted consumer confidence. Subsequently, the U.S. retail outlook changed during our third quarter as consumer demand softened and retailers focused on reducing high inventory levels.

Finally, the U.S. dollar started to strengthen in the fourth quarter, leading to unfavorable translation impact on our fourth quarter results. In addition, a significant transaction headwind developed for our EMEA based businesses, who source the majority of their goods from Asia in U.S. dollars. All in all, the macroeconomic environment has become more challenging as the year progressed.

In response, we implemented multiple rounds of pricing to offset some of these cost pressures. We also reacted quickly and decisively to the declining unit volume late in the year and we initiated cost out actions including reductions in headcount. More fundamentally, we pivoted the operating strategy of the company from expansion and increased investments to running a leaner company that is focused on fundamentals, free cash flow generation and debt reduction. We immediately began a cost reduction initiative during the previous quarter to prepare the company for a more difficult economic outlook in the short term.

I could now have you turn to Slide 7. Here we have an overview of our fourth quarter results. The challenging economic environment I just mentioned is clearly impacting our performance and results as both our net sales and EBITDA modestly declined in the quarter compared to the prior year period. Consumer demand is continuing to normalize to pre-pandemic levels for our hard good categories. Our retail partners are maintaining their focus on taking out inventory, which is translating into lower replenishment orders.

The strong U.S. dollar is further causing our reported sales to be lower due to the impact of translational FX. The volume decrease is contributing to the EBITDA decline, which is also pressured by high demurrage and detention costs and distribution cost related to supply chain inefficiencies. Some of these pressures are offset by the benefits of cost reduction actions, including headcount elimination that we initiated during the previous quarter.

Although pricing now largely offsets the inflation we experienced in the quarter, we faced new headwinds from the stronger U.S. dollar, which directly increased our product costs in various regions through transactional foreign exchange impact. In addition to the unfavorable translation impact on the reported results, we will cover fourth quarter financial performance and business overview in more detail during Jeremy' section.

If I could now have you turn to Slide 8. Here, we have a quick overview of our fiscal '22 results, and as I mentioned earlier, this was a very challenging year for the business. We faced a variety of headwinds that continued to get worse as the year progressed. Unfortunately, however, we were proactive with our counter measures as we initiated multiple rounds of pricing action to offset inflation headwinds.

We took further cost reduction actions including headcount reductions back in May, as we experienced the demand softening and the related retailer inventory reduction actions. All these actions were mitigating some of the EBITA decline from the various macroeconomic headwinds. We are also implementing further price increases around the globe now to help offset the additional pressure from currency movement.

Turning your attention to Slide 9. The measures that we started to implement in fiscal '22 have actually put us in a good position as we enter fiscal '23. We will continue with those measures and refocus our strategy around four core pillars: one, we are streamlining our organizational structure and re-energizing our employee base; two, we are increasing operational efficiencies everywhere and limiting risk; three, we are protecting and deleveraging the balance sheet, strengthening our liquidity; and finally, fourth, we are transforming the company into a pureplay global Pet and Home & Garden business with faster growth and higher margins pro forma.

Starting with the first one. We have taken swift action to reduce our operating costs by eliminating certain roles with an eye towards streamlining our operational structure. These reductions required some difficult decisions, including reductions in every segment of the business involving leadership positions and painful reductions in the C-suite. Along with these reductions, we have continued to invest in the future of the business by bringing in new talent with fresh perspective and best-in-class operating experience.

For example, I'm thrilled to welcome our new Head of global supply chain, David Gabriel, who has joined us from Stanley Black and Decker. As well as our new Head of our Home & Garden business, Javier Andrade-Marin, who joins us with a very strong consumer marketing background and has worked with companies such P&G, Henkel and Reckitt Benckiser.

Second, we are reducing costs by simplifying our business model to focus on fewer, bigger, better initiatives. This includes exiting unprofitable SKUs and rationalizing our product portfolio. This new approach is allowing us to focus on the opportunities to really accelerate profitability across all our business units. We will continue to look for process simplification and cost out opportunities as we move through the fiscal year.

Thirdly, we will maintain our focus on reducing working capital and strengthening our balance sheet as we prepare for a period of low demand growth and higher interest rates. We have truly turned the corner on improving our working capital performance as evidenced by our reduction in inventory by over $100 million during our fourth quarter, including HHI. And we further plan to reduce our inventory by an additional $200 million plus during this fiscal year.

David Gabriel will be leading the company towards a world class S&OP process. which will further support our goal of driving working capital efficiency and generating more cash. In addition, in a proactive move given the longer than originally anticipated time to close the HHI sale, we have executed along with our relationship banks an amendment to our credit facility that temporarily increases our net leverage ratio tests.

Lastly, we remain dedicated to our strategic transformation to become a pure play global Pet and Home & Garden company and to that end, we are committed to closing the HHI transaction and we expect to win the DOJ lawsuit. We have now -- we now expect to close this transaction, no later than June of 2023. The HHI transaction close will allow us to substantially reduce our debt and return capital to our shareholders. We are confident that equity investors are looking to allocate capital to a faster growing, higher margin, pure play, global Pet and Home & Garden business resulting in a significant re-rating of the valuation of our publicly traded shares.

If you move to Slide 10, I'd like to give you an overview of our outlook for fiscal '23. Our high level fiscal '23 earnings framework is that we will continue to execute on our strategic priorities and we expect to grow the top line in the low-single digits. We expect to grow adjusted EBITDA in the low-double digits. We expect the cost environment to remain challenging with certain input costs including labor to continue to increase with some offsets from a decline in the ocean freight rates. Overall, we expect to experience net inflation, but not nearly as significant as the levels we've seen over the past two years.

We are also implementing additional pricing actions in the first quarter, specifically in our European markets to offset additional inflation from the ongoing war in Ukraine and from the strengthening U.S. dollar. We expect this additional pricing to be fully reflected in our results during the second quarter. The first half of this year will therefore remain challenging from a margin perspective as we sell down our remaining higher cost inventory levels and get the full benefit of price increases in Europe.

Specifically, we have approximately $55 million of excess capitalized variances on our opening balance sheet, that will roll through the income statement in the first half of fiscal '23, predominantly in the first quarter. Based on our current input costs, this negative impact to our earnings will be behind us as we enter the second half of fiscal '23.

In fiscal '23, we are committed to strengthening our balance sheet and generating cash to pay down our debt. We will utilize cash from operations, inventory reduction and the proceeds from the HHI transaction to pay down debt and reduce leverage. As I mentioned, we are confident that we will receive $4.3 billion of cash upon the completion of the HHI sale.

However, just to address some of the questions that we've been receiving, in the unlikely event that the HHI transaction does not close, we expect to have cash inflows in excess of $500 million this year, which includes the HHI break fee. In either scenario, we expect to decrease our net leverage to 5 times or less by the end of fiscal 2023.

Now you'll hear more from Jeremy on the financials and additional business unit insights. I now turn the call over to you Jeremy.

[Jeremy Smeltser, EVP & CFO]

Thanks, David. Good morning, everyone. Let's turn to Slide 12 for a review of Q4 results from continuing operations. Net sales decreased 1% excluding the impact of $41 million of unfavorable foreign exchange and acquisition sales of $88 million organic net sales decreased 7.3%. Organic sales were significantly impacted by lower replenishment orders due to higher retail inventory, softer demand for certain categories and the unfavorable weather conditions.

Gross profit decreased $19 million and gross margins of 32% decreased 210 basis points, driven by fixed cost absorption from the lower volume, increased costs from unfavorable impact of foreign currency and continued higher short-term supplier related costs. Price largely offset the commodity and freight inflation in the quarter.

SG&A expense of $221.9 million decreased 12.8% at 29.6% of net sales, with the decrease driven by the impact of cost reduction initiatives, lower project spend on integration and lower variable incentive and stock compensation, compared to the prior year.

Operating income increased to $16.4 million driven by the decline in the SG&A I mentioned and a one-time $3.5 million remeasurement in the contingent consideration associated with the Tristar business acquisition. Our GAAP net income and diluted earnings per share decreased due to higher interest costs, foreign currency losses and higher income tax expense.

Adjusted diluted EPS increased 26.3% due to the increase in operating income. Adjusted EBITDA decreased 5.6% primarily driven by reduced sales volume and unfavorable currency impact with positive pricing offsetting margin pressure from commodity and freight inflation.

Turning now to Slide 13. Q4 interest expense from continuing operations of $27 million increased $6.9 million. Cash taxes during the quarter of $7.3 million were $2.2 million higher than last year. Depreciation and amortization from continuing operations of $22.7 million was $6.9 million lower than the prior year and separately, share and incentive-based compensation decreased by $8.8 million. Cash payments towards restructuring, optimization and strategic transaction costs were $31.4 million versus $19.4 million last year.

Moving to the balance sheet. The company had a cash balance of $244 million and approximately $342 million available on its $1.1 billion cash flow revolver. Debt outstanding was approximately $3.2 billion consisting of approximately $2 billion of senior unsecured notes, $1.1 billion of term loans and revolver draws and $93 million of finance leases and other obligations. Additionally, pro forma net leverage was 5.4 times at the end of fiscal '22, which is consistent with the previous quarter. Capital expenditures were $18.7 million in the quarter versus $17.4 million last year.

Moving to Slide 14 for an overview of full year continuing operations results. Net sales increased 4.5%. Excluding the impact of $94.9 million of unfavorable foreign exchange and acquisition sales of $225 million, organic net sales were essentially flat. The sales performance was driven by poor weather impacting category sales for our Home & Garden business, while Home & Personal Care was impacted by post-pandemic category demand softness during the second half of the year and aggressive inventory reduction actions by retailers in response. This was offset by growth in our Global Pet Care business.

Gross profit decreased by $44 million and gross margins of 31.6% decreased 290 basis points, driven by commodity and freight inflation and unfavorable currency impact, partially offset by favorable pricing and improved productivity, pricing lagged inflation during the first half of the year. Adjusted EBITDA decreased 27.7% primarily driven by the gross margin decline, unfavorable currency impact and higher operating expenses due to inflation and increased supply chain costs.

Now let's get into the review of each business unit to provide detail on the underlying performance drivers of our operational results. Let's start with Home & Personal Care which is Slide 15. Reported net sales increased 11.5% mainly due to the acquisition of Tristar. Excluding the unfavorable foreign exchange impacts of $24.8 million, organic net sales decreased 9%.

The organic net sales decrease was driven by category decline from lower consumer demand particularly in kitchen appliances and retailer inventory reductions. Sales were also lower in personal care appliances, however, garment care posted double-digit growth as post-pandemic recovery continues and we continue to win market share. Sales were also helped by favorable price in the quarter.

Although, retailers continue to work down inventory, it remains higher than targeted. The slowdown in consumer demand coupled with high inventory are most severely impacting the North American markets as retailers continue to order below POS. The EMEA region sales decline was primarily driven by the unfavorable impact of FX. Net of FX, personal care appliances and garment care categories registered growth, but the kitchen appliances category still remains challenged.

On a brighter note, our Latin American business continued to show strength and posted double-digit growth, driven by higher consumer demand and expanded distribution. The overall macroeconomic environment remains challenging, but our products continue to perform well with consumers compared to our competitors.

In fact, we have gained share in the garment care category as our steamer sales more than doubled versus last year and resulted in a 250 basis point share gain in the U.S., helping us to continue to build on our number one U.S. market share position.

We continue to launch new and innovative products to drive consumer engagement and excitement. Recent examples of such products include our George, Foreman, Submersible and beyond grille products. Remington flexes style range of hair appliances and several new air fryer products under the Russell Hobbs, PowerXL and Emeril Lagasse brands.

Adjusted EBITDA increased 93.1% to $28 million due to growth from acquisition, favorable pricing and the impact of synergies and cost reduction actions initiated during the previous quarter. Inflation and incremental short term demurrage and detention costs continue at a reduced rate, but are now offset by pricing in the quarter. EBITDA was also negatively impacted by the unfavorable FX impact and volume declines.

As we look forward to our fiscal 2023, we expect retailer inventory and ordering to return to a more consistent trend to POS starting in the second quarter of fiscal '23. This will also help us continue to reduce our inventory throughout the first half of fiscal '23. As we sell off some of the higher cost inventory from fiscal '22 during the first quarter, our profitability will be adversely impacted.

Although, we are anticipating a challenging first quarter, we expect the business to grow profitability in the second quarter. The Tristar business integration is continuing at an accelerated pace and we expect to substantially complete the integration by the end of -- end of the fiscal second quarter. Commercially, our focus will be to drive fewer, bigger, better consumer relevant innovations that enhances our current market position.

Now let's move to Global Pet Care, which is on Slide 16. Reported net sales decreased 5.2% while organic net sales increased 0.2%. Higher sales in companion animal were offset by continued softness in aquatics and our SKU rationalization efforts. Sales were also helped by favorable pricing in the quarter. With the close of this quarter, we recorded our fourth consecutive year of organic sales growth.

Companion animal sales particularly consumables continue to show growth across geographies, as favorable pricing more than offset unit decline due to slowing category demand. The aquatics category experienced a sales decline as we compare to strong Q4 demand last year, fueled by new hobbyist that entered the category during the pandemic. However, consumables products within aquatics saw year-over-year growth.

Our European sales are negatively impacted by translation FX as the dollar strengthened against the British pound and the euro during the quarter. Adjusted for FX, sales continued to grow in the European markets, despite pressure on consumers from higher inflation and the impact of the war in Ukraine.

In North America, sales were adversely impacted by higher overall inventory, mostly in the pet specialty channel. Pet specialty retailers carry a much wider assortment of aquatics and other small animal products and are adjusting to new pet acquisition rates returning to pre-pandemic levels. Our Latin America business posted strong growth due to new distribution.

Adjusted EBITDA decreased 9.7% driven primarily by the impact of lower volume and unfavorable FX. Q4 EBITDA benefited from additional North American pricing actions that were implemented in Q3. With this new pricing, we are now largely offsetting input cost inflation. EBITDA pressure from volume decline was further mitigated through operating cost reductions, including the benefit of fixed cost reductions initiated during the third quarter.

Overall, we remain bullish that we will continue to experience positive business momentum in fiscal '23. The team is particularly excited to see the ongoing growth in share gains in the nutrition-based products in the portfolio. The operating fundamentals within the business have improved greatly as evidenced by North American service levels reaching their highest levels in 2.5 years. Additionally, we have completely recovered the supply for our critical chews category items, after almost a year of disruption of supply from Asia.

The GPC team remains focused on the execution of our long-term strategy, which is centered around inspiring more trust through the delivery of unique and innovative products in order to drive demand for our portfolio of leading brands. Our pet business is a historically recession-resistant business with tremendous upside potential, which is just another reason why we remain bullish about the continued growth of this business.

Finally, let's turn to Home & Garden, on Slide 17. Fourth quarter reported net sales decreased 19.4% showing a decline across repellents driven by a decline in category sales due to consistent unfavorable weather conditions. Although, we paced with the pest control category, overall category POS was a challenge this season. Controls outpaced the category, while household and repellents were slightly behind the category.

Sales in household insecticides declined compared to last year, where sales were helped out by out of stock of competitor products. Retailer inventory was high coming into the fourth quarter due to slower POS from hot and dry conditions throughout the third quarter. To help clear out end of season inventory, highly targeted conversion tactics were utilized to help drive POS sales.

Retailers also experienced lower foot traffic in home centers, which adversely impacted the POS for cleaning products. Despite these pressures, we saw dollar growth in Q4 versus last year across our top customers for cleaning products. As for product news, the new Flip & Go delivery system now available in Bug Stop, bedbugs and weed and grass killer varieties ended the season with over $10 million in sales, continuing to bring in new millennial households in their respective categories.

In fact, our Spectracide home insect control business is up 29% since the introduction of our Flip & Go delivery system. And Hot Shot had a record year driven by ant, roach and spider in Q4, which was up 30% versus last year. This season, Cutter's line of personal repellents received several recognition awards from sources, like, The New York Times Wirecutter reviews, Forbes Health and Yahoo News. One of the items our Cutter Backwoods dry aerosol was recognized at best DEET-based repellent by New York Times Wirecutter and best overall repellant from Forbes Health.

Adjusted EBITDA decreased 48% in the quarter. The EBITDA decrease was driven by the lower volumes and related to fixed cost absorption impacts. The business continues to see higher product costs from raw material and freight but pricing now covers inflation in the quarter. Although, we are seeing the benefits of fixed cost restructuring and operational cost reduction actions initiated during the previous quarter, EBITDA decline from volume is outpacing these savings.

We are initiating a limited further price increases in fiscal '23. Clearly, we are not pleased with the performance of our H&G business this last year, while we remain confident in the long-term growth of these categories, our business need to be more resilient throughout the weather cycles. We must also further our strategy of growth in the cleaning categories to level out the seasonality and simplify the business overall. We are confident that our strategy will be successful and that the new leadership we have brought in to execute it.

In addition, while we took meaningful cost actions in the business in the third quarter, we have identified further opportunities to run the business more efficiently and improve profitability. We are also developing a more robust S&OP process to better manage the seasonality and its impact on our manufacturing footprint. We are capturing meaningful distribution gains in 2023 and our retail customers continue to stay focused on both cleaning and pest control for the coming years as these consumable categories become more relevant to repeat high velocity purchases.

Let's now move to Slide 18 and our expectations for 2023. As David mentioned, we expect low-single digit reported net sales growth in 2023 with foreign exchange expected to have a negative impact based upon current rates. Adjusted EBITDA is expected to grow low-double digits despite some inflation headwinds, which are offset by the annualization of current pricing actions and planned further price increases as well as additional productivity actions and the benefits of our cost reduction actions.

From a phasing perspective, we expect first half and specifically the first quarter to be challenging, as the demand continues to settle at a lower post-pandemic level and retailers continue to reduce their inventory levels. First quarter profitability is also negatively impacted as we sell through some of our current higher cost inventory.

Turning to Slide 19. Depreciation and amortization is expected to be between $110 million and $120 million, including stock-based compensation of approximately $15 million to $20 million. Full year interest expense is expected to be $110 million, but between $110 million and $120 million including approximately $5 million of non-cash items.

Cash payments towards restructuring, optimization and strategic transaction costs are expected to be between $50 million and $55 million. Capital expenditures are expected to be between $60 million and $70 million. We ended the year with approximately $740 million of usable federal NOLs and expect to use substantially all of them to offset the gain on the sale of HHI. We are projecting to be a U.S. taxpayer once the HHI transaction closes. Cash taxes are expected to be between $30 million and $40 million and for adjusted EPS, we use a tax rate of 25% including state taxes.

To end my section, I want to thank all of our global employees for their strong efforts during these challenging economic times and I'm confident that we have the right actions in place to navigate these headwinds.

Now back over to David.

[David Maura, Executive Chairman & CEO]

Hey. Thanks, Jeremy, and thanks everybody for joining us today. We've covered a lot. And I'd like to take just a couple of minutes to recap the key takeaways. And these are found on Slide 21. First of all, our fourth quarter financial results conclude a very challenging fiscal '22 for us, where we saw sales pressure from changing consumer dynamics, short-term customer inventory actions, which drove significant top line pressure in the second half of the year.

However, we proactively took swift actions to prepare the company for leaner times as the demand started to slow down, but the sales decline outpaced our cost actions in the short run, as consumer demand declines were compounded by retailer inventory reductions. We expect some of these difficult dynamics to continue in fiscal '23 and we are therefore pivoting the operating strategy from expansion and increased investments to running a much leaner company that's focused on fundamentals, free cash flow generation and debt reduction.

Second, we have shifted the operating strategy of the company towards a leaner business built around four key pillars; first, we are streamlining the organizational structure and re-energizing our employee base. Second, we are increasing operational efficiencies and limiting risk. Third, we are protecting and deleveraging our balance sheet and strengthening our liquidity position. Fourth, we are transforming our company into a pure play, pet and Home & Garden business with faster growth and higher margins pro forma.

Third, although, we expect a difficult macroeconomic environment to continue in fiscal '23, we have taken all the right actions to set ourselves up for success. As referenced earlier, we are targeting low-single digit net sales growth and low-double digit EBITDA growth for fiscal '23 and we expect to reduce our leverage by generating free cash flow through improved operating performance and working capital management.

Last, we expect to win the DOJ lawsuit and close the HHI transaction by no later than June 2023 and collect $4.3 billion of cash. Despite the short-term challenges, I remain optimistic about the future of our company, and I believe we're well positioned to execute on our operational goals and generate significant cash flows in fiscal '23. I'm also confident that we will execute on our strategic goals and deliver significant value to our shareholders. For these reasons, I'm very excited about fiscal '23, and I'm looking forward to updating you guys in subsequent quarters.

Before I close the call, I do want to thank all of our employees who have been working diligently through very difficult times to ensure we've set our company up for long-term success. I am grateful to all the sacrifices of our Spectrum Brands' employees and all the sacrifices you've made to help navigate our company successfully through the past couple of years. I thank everyone for your time. I thank you for your continued support.

I'm now going to turn this call back over to Faisal for questions.

[Faisal Qadir, VP, Strategic Finance & Enterprise Reporting]

Thank you, David. Michelle, we can now go to the question queue, please.

[Operator]

[Operator Instructions] Our first question comes from Bob Labick with CJS Securities. Your line is open.

[Bob Labick, CJS Securities]

Good morning. Thanks for taking our questions.

[David Maura, Executive Chairman & CEO]

Hey, Bob.

[Bob Labick, CJS Securities]

Hey. So one, just to confirm one thought, and then I have a question around that. But it sounds like, obviously, there's still impact from inventory restocking issues and all that. How long does that take to work through? Was it implied that, that's more of a first half issue and then we should return to a more normal in the second half, roughly?

[David Maura, Executive Chairman & CEO]

Bob, I'll take it. Look, as I sit here today, I'm feeling good because I got six weeks left to this fiscal Q1, and I got six weeks left to moving up this -- the bulk of this high-cost inventory. So I view it as kind of onetime items because I look at kind of when in my life has freight gone from kind of $3,000 continue to $24,000 and that stuff had to get attributed and capitalized to the inventory that was acquired.

And so yeah, we've been very deliberate kind of starting in May to really get the cost structure of our company down, take the fixed cost for running the business much lower kind of going into what I believe is a recession. And then, frankly, just being pretty aggressive on liquidating the high-cost inventory. And so we made really good progress with that. I hope you can see that it's not just me talking positive on a conference call.

We actually got $100 million of that inventory out in the quarter that we just completed in September, our fourth quarter. We're going to make more progress on that this quarter. That is going to suppress the EBITDA production. Our earnings are going to be subdued as we liquidate that high cost inventory line. But I think that, that's the right decision to make, kind of take the pain on the front end. My personal perspective is, we've already pivoted the balance sheet.

And so while December is usually kind of a use of cash, it's actually going to produce cash this year because we're going to get inventories further down. And that -- but that is going to have a negative impact on the EBITDA earnings in Q1. We think we can manage it. We don't think it's going to be horrible. But yes, we want you to understand the phasing is that we're going to pivot -- while we believe we've pivoted the balance sheet already, it will take us until Q2 to really pivot that P&L and get the earnings going in the right direction.

Jeremy, you want to fill up on.

[Jeremy Smeltser, EVP & CFO]

Yeah, I mean -- Bob, I'd just add, I think that is more of an issue just with HPC and with Home & Garden for different reasons. With Global Pet Care, that's less of an issue, perhaps a little bit in pet specialty. And then I'd just add, look, three of our top five customers reported this week, and my net takeaway from those three earnings reports was positive as it relates to getting through this inventory and getting to a better place.

So overall, I agree with David, we're feeling pretty decent. I think in HPC, in particular, it probably takes towards the middle of the fiscal second quarter to see retail inventories more normalized and [indiscernible] POS pulled through to replenishment.

[Bob Labick, CJS Securities]

Okay. Great. No, that's super helpful color. And I guess kind of just taking a step further from that. If I did the math real quick, the implied guidance, given all of these headwinds, is about a 10% EBITDA margin, which is not the normalized margin. Can you give us a sense of what you think the margin profile will be once we get past this kind of noise?

[David Maura, Executive Chairman & CEO]

Look, I think -- let's start with our two bigger businesses, right. We're trying to become a Global Pet and Home & Garden company. Both of those businesses should be 20% EBITDA margin businesses. They just should. And so we've gone through a lot of turmoil with a pandemic. We've got a lot -- we've gone through a lot of inflation. And then obviously, our pricing lags the inflation, which is subduing the margins. And now you've got this, I call it, it's kind of like the last bit of the backlash from COVID-19, where you've got this high cost inventory. You just got to move off the bucks.

But I think you'll start to see some clarity around real margin improvement in Q2 and then beyond in those businesses. I think Jeremy's point was very good in terms of, look, the appliance business is more durable in nature, and it's just going to take a longer time to kind of work that off and see that margin structure rebound. And obviously, we're in sell mode on HHI, and we're looking forward to winning that DOJ lawsuit there.

[Bob Labick, CJS Securities]

Okay. Super. And I guess last one for me, I'll jump back in queue. Just obviously, we're talking a lot about kind of the near-term stuff. Just give us a sense in terms of how you're looking market share wise and price realization, new product introductions, those kind of things for next year, kind of the more traditional focal points for your outlook for the coming year.

[Jeremy Smeltser, EVP & CFO]

Yeah. I would say, in start-up price. So I think as you heard in our prepared remarks, we're a little more laser-focused in certain areas versus broad-based given the lower level of inflation that we expect in F '23.And when we say that is because we have to think about the timing of when we've actually incurred that inflation, right?

Most of the inflation that we will recognize in our P&L, really all of it in fiscal '23 is actually incurred in Q3 and Q4 and capitalized on the balance sheet at the end of the year. So Europe is a challenge. Transaction FX is a real challenge for both HPC and GPC with the strengthening of the dollar, obviously, eased a bit here in the last couple of weeks, but it's still a significant year-over-year headwind, partly from translation, but more from transaction.

So we have to continue to get additional price there and look for additional costs, frankly. Our new product introductions, I totally agree with you. In the broader parts of our markets, particularly the North American markets where we've had to take so much price over the last couple of years, the real opportunity on margin is around new product introductions were scaling up and how do we move the needle forward on price points with those.

And that's a key part of the strategy, and that will continue. And I think we have a nice set of new product introductions across the businesses that I -- I've mentioned a few of them in my prepared remarks, but I think we're pleased with the progress there, though we have more to do in the future, certainly.

[David Maura, Executive Chairman & CEO]

Yeah. I think, look, let me add to it and just to touch. I was recently -- I've been traveling a lot into the different factories and facilities as we try to get our fixed cost structure down. And I'm really thrilled to have kind of Dave Gabriel running S&OP and everything we're doing there in working capital as recently in the Blacksburg facility, and met with the R&D team there.

Look, we have just a lot of great stuff coming. I prefer to kind of just push that to Q2 and look forward to talking to you there. But we've got a very robust portfolio of brand new products that I think are wildly complementary to our existing portfolio, but I'd rather get closer to them being commercialized and then be able to share that with the investment community. But a lot of good things going on.

[Bob Labick, CJS Securities]

Super. All right. Thank you so much.

[David Maura, Executive Chairman & CEO]

Thanks, Bob.

[Operator]

Our next question comes from Chris Carey with Wells Fargo. Your line is open.

[Christopher Carey, Wells Fargo Securities]

Hi. Good morning.

[David Maura, Executive Chairman & CEO]

Good morning, Chris.

[Christopher Carey, Wells Fargo Securities]

Jeremy, can you perhaps be a bit more specific about the Q1 headwind that you're looking at? Yes, I guess I'm even looking at the Q4 delivery and appliances. And if I just annualize that going forward, which I know -- there's seasonality in that business, but I'm getting to potentially an EBITDA that is already in line with your guidance just based on that business alone. So is that business is going to take a real step back to Q1? The other businesses as well. I appreciate the commentary on Q1 and the full year, but any sort of like specificity would be helpful.

[Jeremy Smeltser, EVP & CFO]

Yeah. Sure. Yeah. So interesting situation with the HPC business. It was really around the end of -- the latter part, I should say, of Q3 and the first part of Q4, where we were experiencing our most significant inflation, particularly around excess containers, causing detention and demurrage costs as well as our need to get overflow distribution space. And so most of those costs, they're significant, they were actually on the balance sheet at 9/30, and they'll be flushed through in Q1 mostly, some in Q2 across the whole company.

I think David mentioned in his prepared remarks, that's about $55 million of capitalized variances that are in excess of our current standard costs that sit on the balance sheet that will fluster the P&L, probably about 70% of it in Q1 and most of that in HPC. And that's why I referenced the sequential reduction in inventory -- or I'm sorry, in EBITDA in HPC because I agree, that would not be our typical seasonal pattern.

The good news is that is behind us. It will be a little bit in Q2. We actually do expect to grow profitability in HPC in Q2. And unless something big changes from a macro perspective, it will be fully behind us in the second half of the year across the businesses.

[Christopher Carey, Wells Fargo Securities]

Okay. I understand. And so in excess of that, and just to again clarify the drivers of the outlook. Excuse me. The demand, I think David mentioned that, that facing it through the demand that's lower post-pandemic, retailers continue to reduce inventory. And then obviously, you're selling through the higher cost inventory. And I'm just trying to assess visibility here. The higher cost inventory, I appreciate that flows through.

But can you just comment on your visibility for guidance after Q1 just in the context of demand lower post-pandemic, tighter inventories at retail? Do you feel like you're in a place where you have enough visibility on where retailer inventories are that by Q2, you should be in a better place? So if you could just frame that, I think that would be helpful.

[David Maura, Executive Chairman & CEO]

Let me take a crack at it, and then Jeremy can fill in the blanks. Look, our Pet business is predominantly consumption-driven business now. And we continue to see positive POS there, as I sit here today. And while pet adoption is down, that installed base from the pandemic is still big. And we're also taking market share. So what I can tell you is Pet is our biggest pro forma business.

While we definitely see things like high-priced aquarium, fish tanks and the durable components of it are down, we believe we can grow through that given that we're more consumption weighted and we've got a lot of new exciting products coming out that we'll talk to you about next quarter.

Home & Garden had, I think, the perfect storm in -- to say fiscal '22 is a challenge. It's an understatement, right? I mean -- and so we're very happy to be kind of through warehouses being full, product -- us having to get second and third places to store product to try to just meet the PO demand from retailers, that expense base should shrink as we try to get back into four walls of a lower manufacturing footprint. We require less distribution warehousing kind of drive those expenses down.

But I can also tell you that we gained distribution in Home & Garden going into this fiscal year. And I think we had the worst weather year in a long, long time for that business. And I know that the Street hates hearing about us blaming weather, but it really did wreak havoc on that H&G business. And so I'm actually pretty bullish about Home & Garden getting some nice growth in fiscal '23 as well. And obviously, the margin structure rebounds as we shed some of those costs that we incurred trying to meet all the demand from our retail customers.

Jeremy, you want to fill in there?

[Jeremy Smeltser, EVP & CFO]

Yeah. And I think in HPC, I agree with David's comments. And then in HPC, look, I think we do have good visibility to retail or inventory. I mean these are our customers. We work with them every day. The big question mark is kind of what happens with the overall, both European and U.S. economy.

And so I think we've been fairly cautious in how we forecasted the topline. But we all have not figured out yet whether this is going to be a softer or hard landing. We don't know where the war in Ukraine is going. And so we think this is prudent, what we put out today based on what we're seeing right now and what we can see in retailer inventory, and we'll see what happens as the year progresses.

[David Maura, Executive Chairman & CEO]

Yeah. Also, listen, let me also tell you. I think if you look back to '08, we actually were able to grow these businesses. Home & Garden and Pet tend to be pretty recession resilient. And so we do take some comfort in that. And quite frankly, we see some trade down occurring at the world's largest retailer. I think that actually benefits our appliance business as well.

[Christopher Carey, Wells Fargo Securities]

Okay. Thank you, both.

[David Maura, Executive Chairman & CEO]

Thank you.

[Operator]

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

[Ian Zaffino, Oppenheimer]

Hi. Great. Thank you. Just on the guide, can you -- and I know you talked about pricing versus inflation, but maybe can you talk about what -- like absolute pricing is up in guidance versus volumes or maybe just kind of touch directionally on that and maybe segments. I'd imagine HPC pricing is the highest pricing because of the inflation. But any kind of color there would be really helpful. Thank you.

[Jeremy Smeltser, EVP & CFO]

Yeah. I mean -- so let's think about kind of compare and contrast the two years, right? So in F '22, we had to get price in the neighborhood of $250 million, right? And we were able to get that and recognize it in the year. We are in a different environment now. And as I said earlier, it's more targeted. So I would actually expect our overall pricing across continuing operations to be low single digits for the full year.

And where in that range of low single digits really will depend on what continues to happen with currency. I feel like from a commodity and a freight perspective, things have stabilized at least much better than they have in the last couple of years, back to a more normalized pace of change, barring any geopolitical activities that happen. Does that help, Ian?

[Ian Zaffino, Oppenheimer]

No, that's very helpful. Thank you. And on HPC and the spin, can you maybe give us an update there? Maybe the timeline, how are you thinking about it? Is it predicated on getting this HHI deal done? Are you going to have to wait for it to close and then you proceed? How are we thinking about the timeline as it relates to that HPC spin? Thanks.

[David Maura, Executive Chairman & CEO]

Yeah. You're definitely correct. We've got to focus and close HHI, and then we've got to deal with HPC after that.

[Ian Zaffino, Oppenheimer]

Yeah.

[Jeremy Smeltser, EVP & CFO]

We continue to work internally to separate the business and be prepared, be ready to go when the time comes. The business -- within the business, we've done a good job there. I like the progress we're making, but I agree with David. We'll focus on HHI as our first priority.

[Ian Zaffino, Oppenheimer]

Okay. Thank you very much.

[David Maura, Executive Chairman & CEO]

Thanks, Ian.

[Operator]

Our next question comes from Peter Grom with GBS. Your line is open.

[Peter Grom, UBS]

Hey. Good morning, guys. Hope you are doing well?

[David Maura, Executive Chairman & CEO]

Hi, Peter.

[Peter Grom, UBS]

Can you maybe just -- can you just maybe give us an update on the HHI transaction? I'm not really sure what you can share, given the situation. But just any thoughts on next steps? Is there a chance in your view that we're not going to go to trial here? Just any thoughts around that?

And then, David, I know you will remain confident in this deal closing for some time. So maybe just help us understand why you remain so confident just kind of given where we are and with everything that is going on. Thanks.

[David Maura, Executive Chairman & CEO]

Yeah. Thanks, Peter. Look, the HHI deal, the original deal is a good deal. And in my opinion, it is good for the American consumer to have ASO run this business. And so I view the original deal as not being anticompetitive in and of itself. I think the original deal was just fine and should have closed. I think the current construct with the remedies that are being offered increase my confidence in that based on the law in this country.

And so my advisers, my legal team is very, very confident that we will win against the DOJ. But these things take time, and I can't give you a great estimate on when that is. I can just tell you, hey, my drop-dead date is June, and we believe we can get it closed by the end of June or before.

[Peter Grom, UBS]

Got it. That's helpful. And then, I guess, I kind of wanted to ask a follow-up to Chris's question earlier. Just on the outlook, but can you maybe just help us frame the confidence there. Is there any sort of conservatism embedded in the outlook. Just because I think what Chris was alluding to is just kind of the lack of visibility in kind of two straight quarters of missing expectations. So just I think people are trying to understand kind of the confidence, if you will, in this kind of 311 to 320 EBITDA number?

[David Maura, Executive Chairman & CEO]

Yeah. Look, I think if I could ask, if I could talk directly to our shareholders, here's what I would tell you. I think strategically, we are absolutely on the right track to create a stronger, faster-growing, higher-margin business called Pet, Home & Garden. We clearly did not anticipate a DOJ lawsuit. If you -- when you talk about the quarterly progression -- actually, if you go -- if you pull your model up right now and you look at our earnings over the last four quarters, we actually, despite being a little softer because of some FX that I originally thought was Q4, we almost comped in line EBITDA year-over-year in the fourth quarter.

The fourth quarter, despite all the problems, was actually our stronger quarter in terms of how it relates. If you look at Q1, Q2, Q3 and Q4 of fiscal '22, we actually claimed closest to the goalpost with the quarter we just reported despite all the headwinds. The reason I'm super bullish and why I think you should own our shares and buy shares at today's level is because I've tried to tell you, and I guess the market doesn't seem to price in the fact that HHI is going to close.

But I've tried to be very transparent that in the event that for some unlikely reason, HHI doesn't close, we're going to collect cash of over $0.5 billion this year. So that's over $12 a share, guys, in cash that we're going to collect here in less than 12 months. So that's -- I don't think that's horrible. And that gets our leverage back down to $5 or less. My base case, which is the highest probability based on the information I have today, is that we're going to close HHI and collect $4.3 billion and completely redo our capital structure.

And so if you do the math and you take a market cap of south of $2 billion and you close HHI, you're buying Pet EBITDA at somewhere around 4 times EBITDA. And I think that's wildly attractive as a shareholder. But I get it. Until we close HHI and we delever the balance sheet and buy back stock, I'm in a show-me phase. But I think we are a very deep value security, and we have numerous catalysts on the horizon. And so I'm actually really excited to put '22 in the rearview mirror and steer us to a much healthier and much profitable -- more profitable 2023.

[Jeremy Smeltser, EVP & CFO]

Yeah. And I would add, Peter, I just think as you look at the outlook for continuing operations, I always think about at the start of the year, what are my variables on topline? And what are my thoughts on variables on the bottom line? And as we enter fiscal '22, clearly, we experienced significant increased cost as the year progressed versus what we expected.

That, by definition, I mean, I've got $120 million of capitalized variances on my balance sheet at 9/30. That means that my costs were $120 million per inventory turn higher than I expected. That's a huge number. As we enter '23, I feel very differently. Our current costs are lower than what's on the balance sheet right now and are more stable than they were a year ago, with the exception, obviously, of the currencies that I talked about for the businesses that are buying from Asia and selling in pounds and euros.

Then you move to the topline. I mean, obviously, again, Home & Garden, HPC, in particular, we experienced significant declines in topline versus what we expected as we started the year. As we enter this year, for appliances, really, the challenges in that market started in April, May, based on what we heard from our retail customers. And so they've kind of been in a darker place from a consumer demand perspective for a while, and we're essentially assuming a fairly consistent level of consumer and customer demand as we go through the year. We've done the same thing with GPC.

In Home & Garden, we really have to use our experience, based on 20 plus years in the business for the team, to figure out what level of moderate recovery we can see after what is the worst weather year that they've ever had. And so none of those are exact sciences, but I think we've taken a prudent approach to start the year, and we will update you, as we always do, on anything that changes each quarter as we progress with earnings.

[Peter Grom, UBS]

Got it. Thanks so much.

[Operator]

Thank you. That's all the time we have for questions. I'd like to turn the call back over to Faisal Qadir for any closing remarks.

[Faisal Qadir, VP, Strategic Finance & Enterprise Reporting]

With that, we've reached the top of the hour. So we will conclude our conference call. Thank you, David and Jeremy. And on behalf of Spectrum Brands, thank you all for your participation.

[Operator]

Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.