Spectrum Brands Holdings, Inc. (SPB) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2014 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, November 20, 2014. Thank you. I'd now like to now introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Thank you, operator, and good morning, and welcome to Spectrum Brands Holdings fiscal 2014 full year and fourth quarter earnings conference call and webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands, and your moderator for our call today. Now, to help you follow along with our comments, we have placed a slide presentation on the Event Calendar page in the IR section of our Web site at spectrumbrands.com. This document will remain there following our call. Now, if we turn to Slide 2 of the presentation, our call will be led today by Dave Lumley, our Chief Executive Officer; Andreas Rouve, Chief Operating Officer and President, International; and Doug Martin, our Chief Financial Officer. Dave, Andreas, and Doug will deliver opening remarks, and then conduct the Q&A session. Now, if we turn to Slides 3 and 4, our comments today do include forward-looking statements, including our outlook for fiscal 2015 and beyond. These statements are based upon management's current expectations, projections and assumptions and are by nature, uncertain. Actual results may differ materially. So due to that risk, Spectrum Brands encourages you to review the risk factors and the cautionary statements outlined in our press release dated November 20, 2014, 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 we'll discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in this morning's press release and 8-K filing, which are both available on our Web site in the Investor Relations section. So with that, I'm very pleased now to turn the call over to our Chief Executive Officer, Dave Lumley. Dave?

Thanks, Dave, and thank you all for joining us this morning. Let's turn to Slide 6. Fiscal 2014 was our fifth consecutive year of record performance. Sales grew 3.5%, and 3.7%, excluding negative FX impacts. Sales growth was consistent across the four quarters, 3.4% to 3.6%. EBITDA grew at twice the sales rate, 7%. Gross margins and EBITDA margins, both expanded. All businesses, except Global Pet grew EBITDA, some to record levels. We met or exceeded our targets on sales, EBITDA, margin, free cash flow, and debt reduction. Our EBITDA margin grew to 16.4% from 15.8% in 2013. That's our seventh consecutive year of improvement. Free cash flow increased to a record $359 million, or we like to say 7% per share. We still work hard on continuous improvement savings and they reached a record annual amount as well. So we delivered growth in every quarter, including the fourth quarter with its increase in sales, GAAP, and adjusted EPS and EBITDA. Q4 adjusted EPS grew a solid 11%. It was our 16th consecutive quarter of the year-over-year EBITDA growth. Our Q4 EBITDA growth rate was strong, absent unusual, ongoing Russian aquatics distribution challenges, and the unfavorable FX impact between the Japanese Yen and the Euro. We expect to resolve the Russian aquatics distribution matter in the first half of fiscal 2015. Let's turn to Slide 7. Overall, we're pleased with 2014, and continued to effectively deploy the powerful weapon we have in our arsenal, a Spectrum Value Model that connects strongly with retailers and consumers. Our Same Performance/Less Price value-branded and largely non-discretionary products are an ideal match for smart, value-focused shoppers. Our Spectrum Value Model enables us to manage the challenges of global economies, sluggish spending by still cautious and financially-stretched consumers. Retail inventories remain tight, and product reorder rates remains tight. Still despite the stagnant store traffic, our products, especially with the stream of new innovative ones, and our model will help us to continue to take market share. This is in spite of increased competitor discounting and promotions, especially from premium product manufacturers. Still we believe the model helps us overcome this. Let's turn to fiscal 2015. We plan for a sixth consecutive year of record performance, despite some new and significant pressures in our businesses. We expect reported sales will increase in the low to mid single-digit range, this compared to the $4.43 billion of last year sales. This will include the Tell acquisition, which we closed on October 1, and anticipated negative impacts from foreign currency of 1.5% to 2% on our sales line. Our growth will come from a dynamic mix of new products with better features, new retailers, distribution and market share gains, geographic expansion, our ever-increasing e-commerce business, better cross-selling, and select pricing actions on a global basis. We also will supplement this by our new Tell acquisition in our HHI's division. Regarding acquisitions, we expect to close on our purchase of IAMS and the European Pet Food business by early in calendar 2015, and is not included -- IAMS, this is in our current sales guidance. Let's go to Slide 8. We, like, everyone else will face some more challenging operating landscape in 2015. It goes without saying that we're seeing meaningful foreign currency headwinds at this time, primarily the Euro, but also across most of our exposure spectrum. There are also commodity cost pressures in our Battery and HHI businesses. Still, we continue to perform well in the marketplace and in this environment. We will accelerate cost improvement initiatives across the business, and increase capital spending to help offset negative FX and cost pressures. We'll talk more about that in the Q&A. Overall, we're optimistic about measured growth in fiscal 2015. We have the right strategies, the right go-to-market focus with our Spectrum Value Model, the right continuous improvement in cost reduction platform, and the right global operating structure to continue to win in this marketplace. As we have said many times over the last five years, our focus remains on growing adjusted EBITDA and maximizing sustainable free cash flow. Our company is really focused on that, or fact, we believe free cash flow is the ultimate wealth creation for our shareholders. Now, some brief comments on our businesses. Beginning with Home and Garden, which is Slide 9. Home and Garden reported record 2014 results, and in each quarter. It was an outstanding year with record adjusted EBITDA margin and 23.6%. This is the sixth straight year of EBITDA and rate improvement. On top of the record performance, our Liquid Fence consumer animal repellents acquisition in January 2014 contributed strongly to the year as well. This business gained significant market share, and outperformed underlying category growth by again effectively leveraging our Spectrum Value Model. We continue to leverage and maximize this model, so every year we can do better. Home and Garden is more excited than ever and is in a position to aim for another record year in fiscal 2015. They have many new products, cost improvement that should more than offset inflation and commodity cost increases, expanded distribution points, and refined promotional plans. Andreas Rouve, our COO, when he comes up, should get into more on that for you. Now, to Remington, which is our personal care business; this is your Slide 10. Remington delivered record sales in 2014 as well. They were up 2% for the year, and EBITDA increased at a much faster rate through a new a near record amount with Europe and North America leading the way. Remington ended 2014 on a solid note with Q4 sales also up 2%, including growth in North America, Europe, and the Asia-Pacific. New product development spending in fiscal 2013 and 2014 is now paying off. New product launches were significant, especially in the second half of the year. Remington is launching a host of new products in fiscal 2015. For instance, we have the new SmartEdge Shaver, the world's first active hybrid cutting technology. What does that mean? We cut the long hairs first, then, we cut the short hairs. We also have a virtually indestructible hair clipper and mustache and beard trimmer. We also have increased expectations for more cost savings. Remington is pushing for a record EBITDA level, and improved EBITDA margin led by North America, where we have some solid new product placements, especially in our core men's shaving and grooming category. We also expect strong e-commerce sales continue to grow as they have been in this category as a whole. Let's turn to Small Appliance division of Global Appliances, which is your Slide 11. The headline: A solid EBITDA growth for the year, and also in Q4, despite essentially flat sales. The lower 2014 sales were not only from eliminating low-margin promotional North and South American businesses with several retailers, but also by only selling in products that really worked for the retailer. Thus, the result was a 60 basis point improvement in annual gross margin percentage. Also helping were record annual cost savings as we saw with Remington. So Europe was a star performer in sales and EBITDA in 2014, and we except us region, along with Latin America to contribute again in 2015. But we're especially optimistic about a stronger performance in our large home market of North America, where we have some significant confirmed new listings. We have the most new products launching since the 2010 Russell Hobbs acquisition. For example, we have exciting new Black & Decker Performance Series Blender and Food Processor. We have a new pizza oven where we can take the pizza from the freezer to the table in five minutes. We have a new Cafe Selects side-by-side K-Cup and 12-cup coffeemaker. And George Foreman is now coming with a new broiler grill. There are more examples for Europe and Latin America, and again, Andreas will take you through some of those. As per Remington, in summary, we're excited about the continued strong e-commerce growth business, and this appliance business of ours, and we do expect another record year of cost savings for small appliances. Let's go to Slide 12. Let's talk about batteries. We delivered an outstanding 2014, and a third consecutive quarter of sales growth in Q4, up 6%, 2014 EBITDA also grew 6%, to a record level, this on a 3% sales increase, along with solid margin improvement. Distribution gains continued. Continuous improvement savings were a record. We also created new revenue streams in 2014, beyond our core alkaline business, portable, on-the-go power, this mostly for cell phones, LED flashlights, and many other complementary power products. As we look to fiscal 2015, the business faces traditional challenges such as foreign currency headwinds just like global appliances. There's still select price discounting, promotions, and concessions from competitors, especially with premium products. Still our battery business looks for steady performance this year from its exciting new product breakthroughs, distribution gains, geographic expansion, new retailers, significant cost savings, and tight spending controls. Now, it's important to remember we reinvest battery cost improvement successes for enhanced product performance. Rayovac and VARTA last as long as any battery we compete. Second, we're going to continue after market share growth and higher retailer, retailer gross margins. So in summary, these are definitely interesting times as well in the changing consumer battery competitive landscape. We believe these changes however will provide more opportunities for our Rayovac and VARTA brand. Let's now go to Slide 13; Global Pet Supplies, in 2014 it was a challenging year for pet as the business as a whole faced an industry decline that affected not only our business but our overall company EBITDA growth. Pet's EBITDA margin for the year though was still a solid 18.9%, only slightly below the 19.3 in 2013. Pet achieved another record year of cost savings in 2014. : There's good news. And that good news is that we have grown share and very recently seen better POS trends in sequence in North America. A couple of encouraging points about Q4; Pet's delivered a 21% EBITDA margin and the North American business match its all-time record high Q4 level sets. This is despite the aquatics softness, and overall sluggish pet store and big-box pet area traffic. We expect pet to rebound in fiscal 2015. Why? Because we're going to have -- we believe we'll have a resolution of the Russian aquatics distribution challenges during the first half of the year. We also know that the key sellers of aquatics are recommitting at the retail level for commercial fish tanks, which we plan and pushing aquatics more because that brings more people into that section of the store, and actually lifts sales at dramatic basis when there are live fish in the pet area. To that end, pet enjoys a strong pipeline of aquatics and companion animal products launching in 2015 in North America and Europe. We'll continue geographic growth of companion animal products in Europe and Latin America, and pets are more than offset product cost increases with continued improvement savings. So finally, pet is preparing for the closing of our acquisition of IAMS and European pet food brands acquired from Procter & Gamble early in calendar 2015. We're pleased about the transaction and it's greater geographic and product segment balance that results for our global pet platform. Andreas will spend some considerable time on this when he talks. And finally, Hardware & Home Improvement on your slide 14; HHI delivered a strong 2014, with sales and EBITDA improving 9.9% and 15.8%. This produced an EBITDA margin of 18.0% versus 17.1% in 2013. The U.S. business drove the growth, especially in the core residential security channel; they also drove growth in both retail and non-retail plumbing sectors. This was also true in Q4, where sales grew 6.8%. Our Q4 EBITDA growth was somewhat slowed due to negative foreign exchange impact from the Canadian dollar. We also had continuing and increased investments in our international locations, and our electronic lock innovation launch; all good investments to keep this business going. So for 2015, HHI expects further top line and bottom line improvements in the base business through growth from its unique and patented SmartKey technology, home automation and electronics, such as our Kevo product, increased penetration into multi-family, showroom, and hospitality channels such as non-retail plumbing, new construction, and international. We've mentioned our plans to enter the large and attractive U.S. light commercial and commercial security channels. This was reinforced with our October 1 acquisition of Tell Manufacturing, giving us immediate presence in the 3.5 billion U.S. commercial market. Now, we also continue to monitor the rate of new housing starts into 2015. As a reminder, only 25% of HHI's business is related to new housing construction. So HHI is making good progress to increase its cost savings level to our division annual cost reduction goal of 3% to 5% of costs of goods sold. We've also begun the conversion of HHI into our low light SAP platform, which we expect to complete by early 2016, leading to additional cost savings in that year. I want to thank you all. I hope you sense the excitement we have about our continuing -- growing this business, delivering free cash flow growth, and market share gains. With that, I'm pleased to introduce Andreas Rouve, our Chief Operating Officer for additional details on our growth initiatives in 2015.

Thank you, Dave, and good morning. Turning to Slide 16, as Dave mentioned, we had in fiscal 2014 a healthy growth rate. And despite the challenging environment, and negative currency headwinds, we expect to continue our organic growth also in 2015. This growth is based on three key pillars. We have in all divisions a strong portfolio of innovative products, which we're bringing now to market. Dave mentioned some examples. Let me give you a few more from each division. As most pet owners know, many humans are unfortunately allergic to pet. To remove this obstacle and to increase the joy of pet ownership, we have developed a range of very innovative allergy blocker products, which are available from this month onwards. But we are not only developing innovative ingredients, we are also looking at innovation for our delivery devices. Our Home and Garden division for example, has developed with AccuShot, a great device which increases precision and combined it with convenience. But also in the more tablets product category, such as battery, we continue to invest into further performance improvements and we are launching a further enhanced alkaline range which will allow us to reach new price points. From the appliance division, we have example which broaden our product range and therefore allow us to expand into new categories. As such, we have just launched in Europe, cleaning brushes in the beauty segment and sonic toothbrushes. Also in our HHI division, the continuous launch of innovation is key. A nice example is the touch-free response activated kitchen faucet under our Pfister brand. If you have some spare time, I'd really recommend you check out our Pfister react video on YouTube. I'm sure you would enjoy them. The second pillar of our growth strategy remains the expansion into more channels. Besides many initiatives in e-commerce, we are launching some of our higher price products such as our IPL hair remover devices on DRTV. Even more interesting is that we are taking advantage of our acquisitions to broaden our footprint in the market. In the case of the Liquid Fence acquisition by our Home and Garden division, we are using the complementary strength of each sale team in the independent and the mass channel. This same approach will be taken with a recent acquisition of Tell Manufacturing by HHI. We intent to launch part of our existing product range in the commercial channel where Tell is strong. And at the same time, we will launch more of Tell products into the retail channel but the acquisitions offer also the opportunity to strengthen our regional footprint. In the case of the announced acquisition of the Pet Food business from Procter & Gamble in Europe, we will be able to take advantage of their historical strength in the U.K. to cross sell our existing product range, whereas, we should be able to grow the IAMS and Eukanuba brand in continental Europe where we have the stronger presence. The third key initiative to increase our EBITDA is to focus on further efficiency improvement. As the complete integration of HHI, we will realize synergies with the integration of our activities in Mexico and Canada. In addition, as Dave noted, we will migrate the HHI business in Mexico, Canada, Asia and the U.S. in the close of 2015 to our shared SAP platform. Moving to Slide 17; I would like to give you additional information on the pending acquisition of the IAMS Eukanuba Pet Food business in Europe. As you can see on this chart, this acquisition would open significant organic growth opportunity as we are given now access to the major dog and cat dry food market. So far we were only active in the Snack and Treat segment but with the addition of IAMS and Eukanuba, we have now a broader complementary product offering. The further benefit of the acquisition is the fact that we acquired two well-established brands, which will support our systematic multi-channel strategy as IAMS is strong in the mass channel whereas Eukanuba is the leading brand in the specialty channel. The chart on the right of the -- the graph on the right side of the chart illustrates what I have mentioned before. We expect good cross-selling opportunities by taking advantage of our strength in continental Europe and the strength of the acquired business in the U.K. Finally, I'd like to mention that this acquisition includes only one legal entity in the Netherlands with a modern highly automated factory and a fully integrated European warehouse. Besides this, we will have a carve-out of sales and support staff in several European countries which we will integrate into our existing legal entity. With that, I'd like to hand it over to Doug for his financial comments.

Thanks, Andreas. Good morning, everyone. I am pleased to participate in my first quarterly earnings call with Spectrum Brands. And I am happy to say that I found exactly what I expected when I decided to join, a company with impressive long-term growth prospect, the right strategies, a solid balance sheet, strong and growing free cash flow, and a winning culture with strong and dedicated employees from top to bottom. Turning to Slide 19; As Dave mentioned earlier, growing adjusted EBITDA and maximizing our sustainable free cash flow are the main focus areas. Our large and growing free cash flow gives Spectrum Brands significant uncommitted optionality for value creation activities, including paying down debt, acquisitions, dividend increases and share repurchases. Free cash flow in 2014, we reached $359 million or nearly $7 per share versus nearly $5 per share last year and $4 in the year before. We reduced term debt in 2014 by approximately $250 million, thereby decreasing total leverage by more than 1.5 turn to end the year at about 4.1 times. We have significant strength, liquidity and flexibility to continue to executing and the Spectrum Value Model. Our fiscal 2014 gross profit was $1.57 billion, a 140 basis point expansion to 35.4% from 34% in the prior year. The increase was driven primarily by improved mix, continuing cost improvements and the non-recurrence of a $31 million first turn inventory charge in fiscal 2013, related to the acquisition of HHI. Fiscal 2014 operating expenses increased $48 million to $1.09 billion due to a $71 million increase in SG&A from investments and selling and the impact of HHI for the full year, partially offset by a $28 million decrease in acquisition and integration charges related to HHI. Turning now to Slide 20; 2014 interest expense was $202 million compared to $376 million in the prior year. The $174 million decrease was primarily due to the non-recurrence of fiscal 2013 one-time cost related to the refinancing of the companies 9.5% senior notes and HHI acquisition financing partially offset by our full years interest related to the acquisition. Fiscal 2015 interest expense is expected to be in the range of $185 million to $190 million, including non-cash items of approximately $15 million. Fiscal 2014 depreciation and amortization was $204.5 million including $59.3 million in Q4, and we expect full year 2015 depreciation and amortization to be between $210 million and $220 million which include the Tell acquisition. Our Q4 effective tax rate was 24%, while the full year effective tax rate was 21.6%, a 35% tax rate continues to be used to calculate adjusted EPS. Cash restructuring charges increased to $29 million in fiscal 2014, compared to $18 million in fiscal 2013. A $11 million increase was driven primarily by HHI manufacturing initiatives and a continuation of expense reduction initiatives. Cash payments for acquisition and integration charges decreased to $20 million in fiscal 2014 compared to $45 million in the prior year. Fiscal 2014 payments were primarily related to ongoing integration of the HHI business. We expect cash restructuring charges of $20 million to $30 million in fiscal 2015 from a combination of new and legacy initiatives. We also expect cash acquisition and integration charges of $10 million to $15 million. Finally, on to Slide 21; fiscal 2014 cash interest payments were $179 million compared to $337 million in the prior year. Excluding one-time cash cost in both years, cash payments decreased by $15 million due to lower payments following the refinancing of the 9.5% notes and repayments of debt, partially offset by the timing of term interest payments and interest related to HHI for a full year. Fiscal 2013 also included one-time cash cost related to the refinancing of the 9.5% notes of $131 million and cash financing costs associated with HHI. Cash interest for fiscal 2015 is expected to be between $170 million and $175 million. Cash taxes for fiscal 2014 were $81 million compared to $50 million for fiscal 2013. The increase was driven primarily by the timing of payments in Germany, the conclusion of several income tax audits and higher international profits. The company has approximately $800 million of usable net operating loss carryovers and is not anticipate being a U.S. federal cash taxpayer for at least the next several years. We will continue to incur foreign and small amounts of state cash taxes. Cash taxes are expected to be between $55 million and $60 million in fiscal 2015. We ended fiscal 2014 in a solid liquidity position with no cash draws on a $400 million ABL working capital facility. We had a cash balance of about a $195 million and debt outstanding of 2 billion 991 million dollars. Fiscal 2015 free cash flow is expected to be approximately $400 million and impacting our free cash flow as we anticipated negative impact of foreign exchange, higher plan capital spending and cash cost related to our new restructuring initiatives. Fiscal 2015 capital expenditures are expected to be between $75 million and $85 million compared to $73 million last year. These incremental investments are expected to increase both the company's margin structure and accelerate our organic sales growth rate in the future. Thank you. And with that, I'll turn it back to Dave for Q&A.

Thanks, Dave, Andreas, and Doug. And operator, you may now begin the Q&A session, please.

[Operator Instructions] Your first question comes from the line of Bill Schmitz with Deutsche Bank. Your line is open.

Hi, good morning, guys.

Hi.

Hi.

Hey, can you talk about the gross margin change in the quarter? That came in a little bit lighter than our model. And then maybe what the outlook is going forward?

Yes, Bill. This is Doug. I think on the second part of your question, you're going to see us continue to investing in CI initiatives and continue to mix the business up as best we can through innovation and just financial growth of the business. So we expect to continue to expand gross margin, knowing though that we have some tough headwinds ahead of us in FX and commodities, but our plan is to continue to expand that. And in the quarter, it was largely a mix issue across the businesses.

Okay. And what mix negative?

Yes. It would, yes.

Yes, it is pet, yes.

Okay, got you.

It was mostly the pet margin mix, especially in aquatics in Russia.

Okay. No, that makes sense. And have you guys taken any stabs on like the pro forma leverage and the cash flow, some other data points on the IAMS acquisition, because obviously the guidance doesn't include any impact from them.

No, we don't do that on a deal-by-deal basis. We do that as you know build across the whole business, and we consistently have been paying down debt, that leverage amount now is about 4.1 times. So now it's a pretty solid area to be in, and we have a view to be able to continue not only to pay down debt, but to invest in opportunities like IAMS and Eukanuba when they come along.

Okay. But you won't tell us what -- after the acquisition for the whole company, what the leverage ratio is going to be, because, like I said, I think the guidance excludes IAMS entirely.

Right.

It does at this point. And once we finalize the acquisition which isn't done yet, hopefully early in the year, early in the new calendar year, we'll come back with that information.

Okay, great. Thanks. And then just the one last one -- Dave, where are you seeing the most activity? You've cited a few times that some of the premium players are starting to discount more because the categories are going more to value brands. Where is that most pronounced? And what's the competitive response from you guys?

Let's think of the whole year, when then making those counts in the whole year, where the retail POS especially in North America was pretty tight. We've seen most of that activity in the battery business, and I think that's understandable in light of the announced spin-offs of those two businesses, and there has been a lot of major changes in some of the awards at some of the channels there. I think that's flushing itself through, I know I say this all the time, but I really do see if I think it will flush itself through. I think with the announced change of the leader there by Berkshire Hathaway will bring some stabilization to the market. And I think that once we get to this Christmas season I think the battery business will return to a little more rationality as these spin-offs go forward. That said, we see that a positive for our battery business. We're getting more and more opportunities to present our model and show how we can sell-through in that environment. I think the days of just two premium batteries at a store are over, and …

Got you. And then just one last one -- I had said I was done, but the higher corporate expense -- I think you guys hit the cash flow piece of the Spectrum 750. So is there a new plan?

Well, when we have something to talk about on that, we'll announce it. But certainly we're working on something like that, and based on our board, and our owners' input, we should have something to talk about on that early next year.

Okay, great. Thanks so much for your time.

All right.

See you guys.

Your next question comes from the line of Connie Maneaty with BMO Capital. Your line is open.

Good morning. Just a point of clarification on Bill's last question; is the increase in corporate expense in the fourth quarter -- is that all compensation-related or are there other things in there?

Yes, Connie. Hi, this is Doug. That's mostly compensation-related.

Okay, fine. Earlier this year I think you had $1.2 billion in usable NOLs, and this release says $800 million. What caused the difference?

Well, we began to use some of them, it's the good news. The business has become profitable. And remember, these are U.S. NOLs. So the U.S. part of our business has become profitable, and we're starting to use those.

So you used $400 million dollars in one year?

Well, there are some. It's not as simple as that, Connie, and we can't take it. I'll give more detail tax conversation offline, if you like. But, yes.

Okay. Why do you think the change in ownership with Duracell and Energizer provides Rayovac more opportunity?

With the change of ownership, Connie, the way that batteries are sold and many channels also included additional leverage with other products owned by those companies are both in terms of rebate programs, co-op programs, and all that. They will now be a separate company without those and clearly they have good brands and spending. Also the shift to show that a mix of batteries at different prices is what working for retailers. Also, we're seeing how many premium products you need versus how many value products you need. So I think all of those things create a more level playing field in the battery business. And remember the battery business is good for everybody. It's usually one of the top 10 selling products at a retailer; very profitable for the retailer and everyone needs batteries. So I think it will provide those changes and those opportunities to let the consumer decide what the best product is and the best price better than it has in the past.

Okay. If I could just ask one more, you talked about an improvement in your alkaline batteries that would allow for better pricing. Could you describe that a little bit and whether you are leading in the category or matching the other two brands and whether this means you will actually be raising list price?

My count was on two levels. One is that we typically reinvest in product performance, mean that we last as long as the leaders. We also have products now last as long as their other products that last longer than in their -- kind of products. So, that's good. That will allow us to price certain products higher than we have in the past. But our real goal is same performance, less price. So, you had a product that last as long and you price it at a little better level to get trial and you go forth from that. So, we're excited about that. We're going to continue to feel that strategy were quite well for five years and then keep them in it.

Okay. Thank you.

Okay, all right.

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

Good morning.

Good morning.

I wanted to start with the Tell acquisition. I know financially it's more of a tuck-in, but it seems highly strategic. I was hoping you could just comment more on your expectations now for your expansion into the commercial lock business. Over the next three to five years, how big an opportunity can this be for you?

This is Dave Lumley. It really gives us, you know, we have products that would work in the light commercial. We have the manufacturing with our Tong Lung operation in HHI. But Tell gives us some know-how and relationships in the light commercial business. So we are very bullish on its ability to grow that. In fact, without giving away a trade secret, they can't make anymore right now. Okay. And we're going to help solve that problem and then with the entry in the relationships they have in the product, with our ability to enhance that and then use our sales forces with theirs. We're bullish about by 2016 what we can do in this business. So, I don't think it should be under estimated that this is a small tuck-in. I think this really gives a chance to grow over the next three years in commercial. Something we're not really in but we can do real well. I can only give you an example, maybe a different example when I was at another company, we bought a well-known independent bike company brand that was small, put it with our big company, that brand grew as big as the big company now, I don't think that'll happen here but certainly that's the idea and that's I think you're going to see really good things by 2016 from this.

Okay, great. And then, you know, looking back a couple years ago, you had done $200 million in free cash flow. And you had walked the Street through the opportunity and identifiable path to $400 million. And you have executed. You are basically there now, and obviously the stock has performed extremely well as you've executed to that goal. Can you tell us the path and the goal for the next three to five years in free cash?

More, but clearly, look, we've talked when we started this $2, $3 a share. We talked at five or six and you guys were like that'll really be good. Now, it's seven, we've talked about getting to eight. Right? So our goal, we are seven and we want to get to eight, when we get to eight, we want to get nine or 10. If you look at our business and how the model works and the share services work, this is what really helps drive us forward. We don't need a lot of CapEx, although we're going to invest some more here, especially in continuing some improvement new products. So, I wouldn't see any reason why we can't keep going on this and especially with as we grow organically but also as we put in the right type of acquisitions. You know, we really spent a lot of time and acquisition does it put of free cash flow. And I know that now that Warren Buffett said batteries are okay, I guess batteries are okay now. So, if you look at the free cash flow of that business, it's fantastic. So, that's kind of where we're going to go. So, our goal is to keep on this trajectory and keep going, that's our goal.

Great. Thanks very much.

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

Hi, good morning guys.

Great.

Hi, Kevin.

So first, on the sort of implied organic growth for the business, I think you guys have been well served historically by kind of putting out the in-line with GDP growth. It looks like implicitly you think you are going to do in the 4% kind of range this year. I was hoping you could elaborate on that a bit, number one. And number two, do you think that this is sort of the new run rate for what you think the business is capable of?

Well, I'll do and then you could just jump in. Yes, we do, Kevin. And I'll tell you why. You know, we've been under the radar in appliances and personal care for a while, while we clean that business up, made it profitable. We have significant new products now that will really drive a top line. Number two, our Home and Garden business continues to move forward with market share gains. And then we have HHI. And you know, we really look at those numbers, you see they're not only growing the core security business but the plumbing business, and all of this retrofit should keep coming. You put Tell in there with the commercial markets, we have no sales. So, fundamentally we think that will happen. You know, also on the pet side, as much as we had some disappointing results, that's coming back. So ironically, you actually -- when you get the sales back and grow but it's twice as good coming back. It also works the other way, like it did this year. So, I think that our model and our premise is good. Now, we also a lot of those sales are growing in the U.S. which is good, right now in this foreign exchange situation. And we're going to continue to emphasize the U.S. and then continue to emphasize those businesses where we manufacture things, thus creating more cost improvement free cash flow. So we've been here before with this amount of FX about three years ago. And we have been preparing for, we know what to do with it and we're going to go forward on it. So, you're right, that GDP growth maybe a little better, 3.5 to 4. We think we can get to. That is with the FX impact.

Yes, the only thing I'd add with that Kevin, is just is that tell us about a 100 basis point to that. That growth you're talking about.

Okay, understood. I guess I kind of got there even backing into that. But we can set that aside. And then on the restructuring piece, Dave, can you talk a little bit about mitigating disruption risk to the business as you combine some of your segments? And then, I apologize if I missed this; did you guys put the number out there in terms of what the savings is expected to be? And then, kind of a third piece to this, how do we think about this relative to the 3% to 5% of cost of goods which you've historically targeted from a cost savings perspective, although seemingly reinvested much of it? A – Dave Lumley: Okay, this is Dave, first of all, Kevin you really missed any number. I know that you didn't miss that. But I understand, okay. We didn't put the number out there yet, because we're in the middle of it, right? But it's obviously a good thing for the business and we can talk more about that in the future. Let's talk about the three units. We're not changing the one thing in regards to the sales and marketing separated people, and PD changes people, the ability to deal with the customer, or the key suppliers. What we did find was, as we grew up and the matter when we put the five units out there, that was four-five years ago, we needed that type of focus to get into some of these issues. But we were there. And we have grown up and our sales service is better. So, we saw the opportunity to combine more of the back room fields and systems allowed us to do that -- allowed us to bring some more management clarity at the very top and imply the model. So we're excited about that. But in no way are we changing what the parts that works. We're simply -- when things grow up sometimes you'll get some duplicate things and what I'll call support services and shared services. And now we found a way, especially with the systems and SAP to tighten that up. I do not see that as a risk. I see that as an opportunity. I'll give you one example, let's say, GBA batteries and appliances. As good as the batteries guys are making things are not quite as good as buying things. As good as the appliance guys are buying things they don't know much about making things. So now, we can put -- bring some purchasing knowledge in that together that case. So that is what we're trying to do. We do not see as this disruptive, hardly at all. This isn't like a big deal where we're making -- like we bought a big company and bring it in together.

Thanks, Dave. A – Dave Lumley: I hope that answers your question. As far as costs are good that is another reason we did it. The world is consolidating. And it's just not consolidating at retail level or in e-commerce level, its consolidating on the supply chain and supplier basis. And in this world you need more volume just like you do on a plan to get more cost improvement. You get parts out faster. So by doing this we again, no matter how much you say to try to work together until you're together, you don't work together as well, this is really helping us with our supply basis in Asia, whether it's rechargeable batteries, whether it's the appliances but same as Home and Garden, pet and HHI. We're excited about that part. And our culture goes in order, free cash flow, EBITDA growth, cost improvement, sales. That's how we go after.

Got it, and just one more -- Doug, initial thoughts now coming in with a bit of a fresh perspective?

Yes, as I said in the beginning. I'm excited. I found what I expected to find here the balance sheet actually improved between the time I began talking to the company, the time I got here and I'm really encouraged with the strength of the balance sheet and the optionality that we have within that cost improvement initiatives, the structuring plan we put in place are all very consistent with the things that I'm used to doing and have done and I've had -- I guess I've seen this in the past as companies grow, as they integrate acquisition, as they mature and go through rounds of this type of organizational change. And so it wasn't a surprise to me. And it was something that was good to jump right into and be able to have an impact on right away. So I'm finding what I what. Aside from that, on the business side, really excited about the new products, really excited about momentum that parts of the business have and the M&A environment is something that was very attractive to me as well. And not that I had anything to do with it but within the first 30 days I was here we announced two acquisitions. So it's been fun. It's been good.

Got it. Thank you very much good luck.

Thank you. A – Dave Lumley: Thank you.

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

Hi, thank you. I just wanted to -- how are you doing there?

Good.

The question would be again on just to nail on this free cash flow a little bit more. You had always said $400 million without growth, but you do have some growth in this number now. And you are at $400 million. But there are some adjustments here and that's what I'm trying to get to. It seems to me that you are penalizing your free cash flow for some of the acquisitions and the costs associated with them, but you are not adding the incremental benefit from that. And then also you have this restructuring which is newly announced. So does that mean the $400 million, if you do a clean comparison to comparison would be something like, at the midpoint, $32 million higher if you are taking the cash restructuring and then also the acquisition integration charges? So you have growth, and it really should be about $432 million of free cash flow. Is that the right math? Am I missing anything there?

I'm not going to go into the specifics or the math but conceptually what we're doing this year versus what we had been saying throughout last year that may a couple of things that have changed when we said we had a line of sight of $400 million. And one of those is our decision to invest a little bit more in CapEx going forward and those CapEx investments are specifically designed to drive cost improvement initiatives and to drive innovation in top line growth going forward. So those are all going to payoff next year, but we'll begin to see benefits from those as we go forward. So that's one piece of it. The other piece of it is the impact of foreign exchange on the entire business. There's a cash flow impact there, because as you know a big part of our business is in Europe. And the Euro and the Pound had been impacting in a meaningful way. So, and then finally as you mentioned we will be spending a little more money than we had previously said in restructuring initiatives.

So it seems to me, if I put this all together, and you said it was $400 million without growth but $425 million with growth, the business is actually outperforming that $425 million if you make your adjustments, if you consider that FX has gotten less favorable. The core business is basically outperforming what you are talking about previously. Is that right?

Well, it's all goes in the pot. We stir it all up and come out with a right cash flow number without giving complete specificity but remember we've got fairly met, and we've got some other things as well.

Okay, good. Thank you very much.

Your next question comes from the line of Jim Chartier from Monness, Crespi, Hardt & Co. Your line is open.

Hi, thanks for taking my question.

Hi Jim, how are you?

Good, thanks. So, I guess first question can you just walk us through what the FX impact on EBITDA is? How 1% change in the impact on revenue flows through the EBITDA?

Yes, we're not going to disclose at that level, Jim. What we'd say is we have a clear line of sight. And we look at it every day because they really seem to change every day. And it's a moving target. We don't know exactly where it's going to come up for next year. But we do know what our supply chain looks like across the businesses. And we do know where our businesses are. So we know what the transactional and translational implications are, but having said that, we got a lot input cost and lot of opportunities across the business to drive improvement. So we're focusing on all elements, not solely focused on FX.

Okay. And then you mentioned for a couple of businesses a headwind in terms of higher product cost inflation. How, I guess, for the overall company, are you seeing cost pressure for 2015 versus 2014?

It's either mostly be in the batteries business and the think area and steel and battery and in the HII business.

Yes, it's pretty isolated to that.

So again, on a consolidated corporate basis are you seeing more cost inflation this year or cost pressure this year than you did last year?

I'd say modest inflation.

Yes, so far, very little.

Okay, great. And again, a few months ago you talked about the path to $400 million of free cash flow. You said CapEx would go down and restructuring and integration costs down, too. So as we look toward 2016, should we think about CapEx still being in the normalized $65 million to $70 million range?

I think it probably will, especially when you consider the couple of businesses coming on with Tell coming on. and if you assume that we close on the IAMS and Eukanuba deals then CapEx will actually step up a little bit. But I think the way we think about it is what is the return on our incremental CapEx investment and how does they compare to do all the uses of our capital. And the extended of they make sense we're likely to do them. But we're never going to be a company that invests huge amounts in CapEx.

Okay. And then are you guys assuming the interest expense related to the IAMS acquisition in the guidance you provided today for …

No, that is not in the numbers we spoke about today.

Okay. And then I just wanted to talk about -- a lot of large companies like Procter & Gamble seem to be shedding some non-core assets. How do you guys feel about the M&A environment, the potential for more acquisitions, given what you're seeing today? A – Dave Lumley: This is Dave Lumley. First of all, we like the businesses. We're not talking about what they're doing. Number two is we will continue to look for a creative tuck-in deal especially in HHI, Home and Garden and pet. But we're also going to digest what we have and we're going to deal with these issues and we want to do that the right way. We're going to opt -- we'll always have our eyes open for maybe another leg to the businesses like we did with HHI or something that compliments HHI. But right now, we're really going to be focused on the things we've been talking about and stabilizing things and moving forward. We had some really good opportunities to grow market share in our businesses as well this year. So let's -- just bought two things, let's get them in. let's go. Let's straighten up and then increase our free cash flow, get our cost savings, but we have a very disciplined process to look at new business opportunities in M&A and it's really led by our chairman who spends a lot of time on it with working hard with us. So, I think we have that covered.

Great. Thanks and best of luck. A – Dave Lumley: All right, thank you.

Thank you.

Your next question comes from the line of Lee Giordano, CRT Capital. Your line is open.

Thank you, good morning everybody.

Hi, Lee. A – Dave Lumley: Hi, Lee.

I was hoping you could talk a little bit more about what you are seeing in the Kevo door lock and how that is performing relative to expectations. And is that a key part of moving into the commercial side? Do you think that could help there? And then secondly, can you talk a little bit more about the Home and Garden business? It looks like you had a really good quarter relative to expectations. Did that benefit from weather at all? Obviously Liquid Fence helped as well. But what's going on in that category that's giving such great results? Thanks. A – Dave Lumley: Okay, I'll do Home and Garden first and then go back to Kevo. Home and Garden had an extended season. Now, we've said this for two or three years, so maybe bees and mosquitoes have just decided that they're going to be around and longer, clearly. But that helped us. what really helped us was significant share gains in all the channels especially in some we hadn't been in before using Black flag and using -- that was an acquisition of ours besides our other products like Cutter and Repel insect repellent. We'd grown in bedbug quite a bit too. So that division has really put its time and effort in gross share. And get that product once they're in store out. We have a large merchandising force there that weekends and gets it's all up. So Home and Garden are doing the -- following the model, do new products, of some of them extended season Liquid Fence helps, right? That's a growing category. I think Home and Garden is on the right track; very focused and in fact as the leader of Home and Garden, who is going to also be the leader of our new pet and Home and Garden division we see big upsides there as well, as we can pick up some of those learning both sides from his leadership position. Now, regarding Kevo, Kevo did better than we thought. It was in the double-digit of millions of sales. It got a lot of attention for the SmartKey technology which is in our quick set locks, and we actually sold more those form it too. And as home automation moves forward, not only do I think it will help in the consumer market place, but it gives us a reason to talk on the light commercial side more than we had before. Maybe you're not going to put a Kevo lock in every door but you're; going to put them on the key door but it is being able to pull us innovation together. So I think if you viewed it as something you needed in the arsenal, something that's ahead on the competition, much higher price point, and can be sold online as well, which is doing well. So, I think Kevo achieved its goal. We're going to keep growing it. I think it will grow in the light commercial market too. But it really is providing consumers attention to our SmartKey technology if you remember that's where you can re-key a lock in 15 or 20 seconds. As if you've ever tried to re-key a lock, then that's like two hours, right? So it's very exciting. And I think it's one of these really need things that will grow a bigger category. Does that make sense?

That's great, thanks. And Dave, maybe you could follow up just on the plumbing business. It sounds like that business has exceeded your expectations since you acquired HHI. What are your thoughts on that longer-term? A – Dave Lumley: We don't get a chance to talk about it but we're really proud of that. If I'd tell you of all the things that I've seen HHI doing a lot of them are good. Plumbing was number four player in United States against three really well-known brands and really good companies, right? They just keep growing and growing and growing. And they're doing it because they have outstanding designs and finishes. And the y do it because they put together a combination that the consumer can understand just by package A, package B rather than spending -- if you've ever tried to do this we're trying to match everything in the bathroom. It's a little bit of a challenge. And they did some innovative marketing with their key customers and led by the customers too. And it just keeps growing because it's priced right, and looks good, and it works. So I don't want to call in the array of active plumbing but they actually -- Rayovac and Pfister are filling that value-branded good performance and in the case of this great design and color. So I think you're going to see that continue to grow in that market place and hats off to that team at HHI.

Thank you very much. A – Dave Lumley: Operator, we have time for one more question before we close down the call. There is one?

Your next question comes from the line of Karru Martinson with Deutsche Bank. Your line is open.

Good morning. It's Karru Martinson.

Hi, Karru.

Just wanted to touch base on the inventory levels; given all the news on the port slowdowns on the West Coast, how do you guys feel about inventory at retail? And I guess also, do you see an impact going into the first half of 2015? A – Dave Lumley: Hi, this is Dave Lumley. We've anticipated this. we brought in extra inventory in our fourth quarter, especially in the client businesses which are the entire supply chain is that way we've also created a situation where we can substitute products if necessary. We're seeing it starting to impact. I think we will be all right. Like I said, we've been watching this for six months. I do believe that if it's a proactive for a very long time, well then it will impact the entire U.S. business across the board. Most of our products outside of appliances, we have a line of sight, not most with many. Take batteries, pet, home and garden. Our factories are in the United States, so some of those were in better shape than others. I think that if you look at the history of this that they usually allow a couple of weeks. This is all unusual for us to slowing, slowing, slowing, sign, but we've anticipated. We have the inventory. We have a U.S. based. I think we'll be fine. I know we'll just have to wait and see now. We've done what everything we could do and we'll go from here.

Okay. And then when you look at the sluggish pet store, big-box pet traffic, what's been going on in that category? It has been a consistent performer for quite some time, and certainly have been hearing that same commentary coming out of the retailers. Has something changed in that market? A – Dave Lumley: I don't think anything fundamentally has changed. This is my opinion. But I'll have a chance to speak to the three leading retailers in the United States. And we've spoken to the other ones. It seems to fall into the few categories. There is been consistent steady growth rates. That's true. But we also had kind of a recession, where people took a little step back from a lot of things, and pet was a little included in that. Rather than the more expensive, they went to the medium. Rather than the medium, they went to the low. Some people didn't come in. Now, this is self-fulfilling prophecy in aquatics as retailers worldwide reduced their live fish tanks, because operationally it was more difficult. We could have innovated better, which we've done now. We could have made better fish tanks commercially, which we've done now, an eight-footer to a four-footer, a 16 to an eight. And then, when the retailers saw that it could impact their department by as much as 5% of POS to whole department when you take live fish out -- well, they've got their religion now. They're putting it back in. If you look at aquatics, especially over the last 20 years, it had a few ups and downs, okay? So this isn't a fundamental change. This is I think a one-year blip in the action. The fish tanks are going back in. The new products are better priced entry level fish tanks and fish food and globe fish and all kinds of neat things are going in; simpler reasons. We found ways to help the consumer have fish live once he come home better. So I think that this thing is back on track. I think in terms of companion animal, what's been going on is lot of the retailers thought they were going to do private label for everything. And that just hasn't worked. And as they bring brands back in, mixed with some private label, they're seeing the consumer return with a reason to buy. We also, the pet industry has come out with some really new things, new allergen products, that's huge for people who can't come to your house for cats, right? The new products we have talked about in the aquatics and the great new products and dog treats were those types of things, premium dog foods like we just got involved in with the right formula. So the reason to buy is coming back. People have little more money now. They spend on themselves and they spend on their pets. So this is a long answer, but I think fundamentally you'll see a swing back to what it was. Now, you had some disruption with some of the retailers in their businesses in this category or in the category killer you might sell, and that slows things down, but I think fundamentally you'll see '15 back and '16 really good. I'll be surprised if that didn't happen. And we drive a lot of that ourselves with the leading aquatics supplier in the world. So we know what we're doing and we know what's happening. So I think we'll see a return to much better situation.

I'd now like to turn the conference back over to our presenters.

Well, thank you very much. And with that we'll now conclude our conference call. And I certainly want to thank Dave, Andreas, and Doug, and to all of you on behalf of Spectrum Brands, we want to thank all of you for participating in our fiscal 2014 full year and fourth quarter earnings call. All of you have a good day. Thank you.