Spectrum Brands Holdings, Inc. (SPB) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands' Fiscal 2015 Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, November 19, 2015. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations. Mr. Prichard, you may begin your conference.

Good morning and welcome to Spectrum Brands Holdings' Fiscal 2015 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 this morning. Now, to help you follow our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at www.spectrumbrands.com. This document will remain there following our call. So let's go to the slide presentation and starting with slide two, you'll see that our call will be led today by Andreas Rouvé, our Chief Executive Officer, and Doug Martin, our Chief Financial Officer. Andreas and Doug will deliver opening remarks and then conduct the Q&A session. Turning to slides three and four, our comments today includes forward-looking statements, including our outlook for fiscal 2016 and beyond. These statements are based upon management's current expectations, projections, and assumptions and are by nature, uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements that are outlined in our press release dated November 19, 2015, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statement. Also, please note that we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filing which are both available on our website in the Investor Relations section. With that, I'm now very pleased to turn the call over to our Chief Executive Officer, Andreas Rouvé. Andreas Rouvé: Thanks, Dave, and thank you, all for joining us. Turning to slide six, fiscal 2015 was our sixth consecutive year of record financial results. We delivered a solid performance and overcame major challenges, including significant negative currency headwinds, a prolonged slowdown in first half of the year and go-to market challenges in our North American Battery and Pet legacy business, which we are addressing. Despite all these headwinds, we were able to grow our adjusted EBITDA. In our legacy business, this means without acquisitions, we could overcome the challenges and grew adjusted EBITDA in the fourth quarter by $4 million. If we exclude also the negative currency impact of $22 million, our organic growth rate was even a very strong 14% in the quarter. For the full fiscal year, our reported adjusted EBITDA grew $76 million year-over-year with a margin expansion of 70 basis points to 17.1%, the eighth consecutive year of margin improvement. Organic adjusted EBITDA, excluding $74 million of negative currency, increased by over 10% and significantly faster than our organic sales increase. So, how did we achieve this? Home and Garden and our HHI divisions had record years, and also, our small appliances and personal care business delivered a strong performance. Regionally, Europe was a bright spot again. Each of our European business grew for an overall 8% in sales and 16% in adjusted EBITDA in constant currency. In Latin America, we continued to implement price increases to offset a large negative currency impact, helping deliver improved organic sales and adjusted EBITDA results. In addition, we exited unprofitable product categories in HHI and significantly reduced ineffective promotions in Battery and Pet North America, which led to a favorable price mix effect. Last, not least, we continue to focus on cost improvement savings and we benefit from the fact that we started to leverage expenses across the company from a closer cross-divisional and global corporation. I referred earlier to the fact that we are addressing the challenges in Pet and Batteries-North America. We are pleased with the operational improvements we're already seeing in the Pet business and its bottom line has been stabilized as we focus on profitable segments and strengthened the brands by investing more in operations, as well as in sales and marketing. It is encouraging to see, for instance, that the aquatics category has turned POS positive recently. We expect a very solid sales and profit growth in fiscal 2016 for the Pets business. We are also making good progress in turning around the Battery business in North America and we should be able to present more details at our next quarterly call. Turning to slide seven, fiscal 2015 was also a year of strategic and accretive acquisitions that will accelerate our growth, enhance our margin profile, and extend our product category and geographic reach. We completed the integration smoothly and ahead of schedule of Tell into our HHI division of IAMS and Eukanuba into our European Pets division and of Salix into our American Pets division. We are making also good progress to complete the integration of our new Global Auto Care division smooth and fast. Now, we are shifting our focus to accelerate organic sales and implement margin expansion initiatives for each acquisition in fiscal 2016. You will continue to hear from me about our focus on organic growth. With our more, more, more strategy, which means entering into more countries, serving more channels and launching more categories. Our objective is to fully leverage the R&D, purchasing and manufacturing capabilities of each of our four global divisions and to take advantage of our strong regional sales presence to ensure that Spectrum Brands is the preferred strategic partner to our retail customers. The global markets remain challenging and competition is intense, but we are optimistic about healthy sales and adjusted EBITDA growth and a steady margin expansion in fiscal 2016 along with a more than 10% increase in free cash flow and continued deleveraging. New products, new customers, increased cross-selling, geographic expansion and continuous improvement in savings should contribute to another record year. Even as we step up our R&D and marketing activities, we will maintain tight control of expenses, and we will fully leverage our shared service platform globally. As always, we maintain a clear focus on growing adjusted EBITDA and maximizing sustainable free cash flow to drive grater shareholder value. To that end, we expect fiscal 2016 reported net sales to increase in the high-single digit range including acquisitions, but partly offset by the anticipated negative impact from currencies and to deliver free cash flow in the range of $505 million to $515 million. Let me now turn it over to Doug for our financial review and comments on the divisional performance.

Thanks, Andreas, and good morning, everyone. Turning to slide nine, let's review Q4 results beginning with net sales. Fourth quarter reported net sales of $1.31 billion increased 11% versus last year. Excluding the negative impact of $73.6 million of foreign currency and acquisition-related net sales of $178 million, organic net sales increased 2.2%. Record growth in HHI, strong personal care and small appliances results and strong European volume growth were partially offset by the reduction of promotional initiatives in North American Battery and North American Pet. Reported gross margin of 35.7% increased from 34.9% last year, primarily due to acquisitions and improved mix, partially offset by the negative impact of foreign exchange. Reported SG&A expense of $299.3 million, or 22.9% of sales, improved by 10 basis points versus 23% last year. Reported operating margin of 10.3% also improved by 50 basis points compared to 9.8% last year. On a reported basis, lower Q4 EPS of $0.44 compared to $0.90 last year, principally due to a higher effective tax rate relating primarily to the finalization of the Global Auto Care purchase price allocation and its impact on Spectrum Brands' valuation allowances and deferred taxes. Adjusted EPS of $1.13 versus $0.98 last year increased primarily from the impact of acquisitions and improved mix and partially offset by the negative impact of foreign exchange. Turning now to slide 10. Interest expense in fiscal 2015 of $272 million increased $70 million due to acquisition financing, including non-recurring items of $59 million and capital structure refinancing initiatives. Cash interest payments of $250 million were $71 million above last year, driven by acquisition financing, including non-recurring financing and refinancing items of $74 million. The Q4 reported tax rate of 59.4% increased from 24% a year ago primarily due to the finalization of the purchase price allocation for the Global Auto Care acquisition, netted against valuation allowances and deferred tax assets. Our full year tax rate of 22.7% versus 21.6% last year increased due to the geographic mix of earnings and the impact of acquisitions on U.S. GAAP tax expense. Cash taxes for 2015 were $54 million compared to $81 million in the prior year. Depreciation and amortization was $218 million. Cash payments for acquisition and integration and restructuring and related charges for 2015 were $54 million and $21 million, respectively. Acquisition and integration charges included $21 million related to the Global Auto Care acquisition. Now to our operating unit results, beginning with Global Auto Care, which is slide 11. In its first full quarter as part of Spectrum Brands, Global Auto Care reported net sales of $96.1 million and adjusted EBITDA of $28 million for an adjusted EBITDA margin of 29.1%. Armor All and STP experienced solid POS at key U.S. customers, while lower retailer replenishment levels impacted A/C PRO results. Contributing to the improvements were recent new product introductions including Outlast protectant and leather restorer, Quicksilver wheel and tire cleaner, and Ultra 5-in-1 engine treatment and fuel system cleaner. The integration of GAC continues smoothly and on a very aggressive schedule. Initiatives are underway to grow the Armor All, STP and A/C PRO brands in high potential international markets and channels. Turning now to slide 12, Hardware & Home Improvement. HHI reported record results in fiscal 2015 driven by strong growth in its core U.S. residential security and plumbing businesses, along with the Tell acquisition. This included a record Q4 in which reported net sales grew 5.6% and 8% excluding negative FX of $7.7 million. Our planned exit from unprofitable businesses and the expiration of a customer tolling arrangement also negatively impacted sales by 2.8% in Q4 while improving margin. In fact, Q4 reported adjusted EBITDA reached a record quarterly level of $65.2 million with a 210 basis point margin improvement to 19.7%. This was HHI's 11th consecutive quarter of year-over-year sales and adjusted EBITDA increases since its December 2012 acquisition. HHI plans another record year in fiscal 2016. Innovation has been key to HHI's growth, and the 2016 new product roadmap is HHI's best ever, with launches planned in every quarter in locks, plumbing and builders' hardware. Growth drivers include extending our leadership position in home automation and electronics, extending the multifamily commercial market expansion initiative, stepping up organic international growth in Canada and Latin America, and expansion of Tell in the U.S. light commercial market. Operationally, cost improvement and metals deflation are expected to offset pricing pressure and inflation. Now to Global Pet, which is slide 13. Fiscal 2015 was a transformative year for Global Pet. Two acquisitions were completed and integrated. Our international pet legacy business continued to grow and a turnaround gained traction in the second half of fiscal 2015 in our North American legacy business. Full year reported net sales grew 26.2% including Salix and IAMS totaling $200 million. In Q4, reported net sales grew 37.2% including acquisition revenues of $71 million. Excluding the negative FX impact of $7.9 million and adjusting for acquisition revenues, Q4 sales fell 2.5% due to the timing of holiday shipments and planned exits of low margin promotions in North America, partially offset by companion animal product growth in Europe. Q4 reported adjusted EBITDA grew 25.4% due to acquisitions, while the margin fell 180 basis points to 19.2%. In our legacy North American business, Q4 reported adjusted EBITDA improved 100 basis points despite the sales decline. This is further evidence that operational improvements and restructuring benefits begun in Q3 in North America legacy pet gained traction in Q4 compared to declines in the first half of the year. These initiatives are helping to set the stage for a resumption of sales and EBITDA growth in 2016 for our North American legacy business, along with continuing growth in the international arena. Regarding acquisitions, IAMS and Eukanuba results continue to meet our targets, with Salix tracking ahead of expectations. Moving to slide 14, Home and Garden, which reported another record year in fiscal 2015, highlighted by an adjusted EBITDA margin improvement of 270 basis points. Share gains were achieved in repellents and household categories, and controls also grew, helped by our new Spectracide AccuShot delivery system. Operational execution was outstanding, continuous improvement savings were strong, and overall category growth was unusually strong due to favorable weather patterns throughout the season. Comparing against a record Q4 last year, Home and Garden delivered flat reported net sales and 9.4% growth to a record Q4 reported adjusted EBITDA of $24.4 million, which is almost a 200 basis point improvement over the prior year. Q4 gross margins improved significantly, driven by mix and flat expenses. It was a strong finish to an outstanding year on all measures of performance. Home and Garden plans another strong year in 2016 from a mix of innovation, market share gains, increased distribution and operational excellence. Now to Personal Care, which is slide 15. Remington delivered a strong year and finished with a solid Q4. Full year 2015 reported net sales fell 2.6% but grew 6.6% excluding unfavorable FX of $49.4 million. Reported adjusted EBITDA reached a record annual level with a 110 basis point margin improvement. On a constant currency basis, adjusted EBITDA improved 29%. Q4 saw a similar pattern. Reported net sales fell 2.8% but grew 7.9% on a constant currency basis, excluding unfavorable FX of $13.9 million. Reported adjusted EBITDA grew in the low single-digits and 21% on a constant currency basis, excluding $2.8 million of unfavorable FX. Q4 growth was driven by new products and distribution gains in North America shaving and grooming and by promotions and new customers in hair care, hair removal, and grooming in Europe. Overall, fiscal 2015 was marked by a strong international volume growth and major improvement in North America. The benefits of leveraging global new product development platforms and introduction of men's and women's products that drive incremental volume growth at higher price points were key to Remington's performance. Remington plans another year of solid results in 2016. Now let's turn to Small Appliances on slide 16. Small Appliances also delivered a strong year and an excellent performance in Q4. Full year 2015 reported net sales grew by 3.8% and 7% excluding unfavorable FX of $47.5 million. Reported adjusted EBITDA improved 5.1% with a 50 basis point margin improvement. On a constant currency basis, adjusted EBITDA increased nearly 36%. In Q4, reported net sales were flat, but grew a healthy 8.2% excluding unfavorable FX of $15.9 million. Q4 reported adjusted EBITDA fell but grew more than 33% on a constant currency basis, driven by expansion in North America and Latin America. Our core Small Appliances business is healthy in every region of the world, each of which delivered double-digit adjusted EBITDA growth in constant currency. North America demonstrated strength throughout the year with shelf space and market share gains in several key categories. Strong volume gains, improved mix, and solid continuous improvement savings were drivers in Q4 and throughout the year. New product introductions were a major factor in the business' strong results. In Europe, for example, 25% of all Russell Hobbs appliance sales came from new products introduced during the fiscal year. Strong e-commerce growth continued in both North America and Europe. And Small Appliances expect further sales and EBITDA growth in 2016. Finally to Global Batteries, which is slide 17. Full year and Q4 reported net sales decreased 13.4% and 14.7%, respectively. Excluding $85.5 million and $28.1 million of negative FX impacts, organic sales fell 4.5% and 4.2%, respectively, on the year and in Q4. In North America, reported net sales fell at double-digit rates throughout the year due primarily to reduced promotional activity and a retailer customer bankruptcy. By contrast, Europe again delivered strong growth throughout the year on a local currency basis driven by new retail customers, market share gains, and promotions. In constant currency, European net sales grew in the high single-digit range. Q4 reported adjusted EBITDA decreased 10.8%, while growing 9.3% excluding negative FX of $10.2 million, which was a major sequential improvement from Q3. For the year, reported adjusted EBITDA fell $27.4 million with margin contraction of 40 basis points. Adjusted EBITDA was unchanged on a constant currency basis. Strong, continuous improvement savings along with improved mix more than overcame product cost and inflationary pressures. Tight spending controls were also an important contributor. Looking to fiscal 2016, we expect improved performance from the Global Batteries business, in large part due to the stabilization of our North American region as it anniversaries the aggressive fiscal 2015 competitor holiday promotion activity and continued constant currency growth outside of North America. Moving now to the balance sheet on slide 18. We ended 2015 in a very strong liquidity position with over $460 million available on our $500 million cash flow revolver, a cash balance of about $248 million, and debt outstanding of $3.98 billion. During the year, we strengthened our balance sheet and improved liquidity through significant capital structure activity, including extending the duration of our term loan facility and replacing the ABL with a $500 million cash flow revolver, which significantly improves our liquidity position. We also issued equity in connection with the purchase of Global Auto Care. Since the acquisition of Global Auto Care in May, we reduced pro forma total leverage by 0.5 turn to 4.4 times, consistent with our previous guidance by directing our strong free cash flow to debt reduction. We expect to reduce our total leverage by another 0.5 turn to end fiscal 2016 below 4 times. Fiscal 2015 free cash flow adjusted for non-recurring items related to acquisitions and refinancing was $454 million, ahead of our guidance of up to $440 million and comparing to $359 million in the prior year. Fiscal 2015 capital expenditures were $89 million compared to $73 million last year. And finally, during the year, we repurchased 230,000 shares of common stock for $21.2 million. Turning to slide 19 and our 2016 guidance. We expect reported net sales to increase in the high single-digit range, including acquisitions and partially offset by the anticipated negative impacts from FX of approximately 200 basis points to 220 basis points based on current spot rates. This will be primarily in the first half of the year. About 40% of our annual sales are outside of the U.S. across a broad basket of currencies. We expect to deliver free cash flow between $505 million and $515 million. Drivers include full year interest expense between $235 million and $245 million, including approximately $15 million of non-cash items resulting in cash interest payments between $220 million and $230 million. Depreciation and amortization is expected to be between $230 million and $240 million, including approximately $50 million for amortization of stock-based compensation. Our effective tax rate is expected to be between 10% and 15%. And recall that for adjusted earnings, we use a 35% effective tax rate. Cash taxes are expected to be between $50 million and $60 million and we have approximately $700 million of usable NOLs as we begin 2016. We do not anticipate being a U.S. federal cash tax payer for the next three to four years, but we'll continue to incur foreign and small amounts of state cash taxes. Cash payments for acquisition and integration and restructuring and related charges are expected to be between $30 million and $40 million. Capital expenditures are expected to be between $110 million and $120 million with incremental investments including the impact of full year expenditures supporting recent acquisitions, a major aerosol capacity expansion, and a support technology and innovation. And now, back to Andreas for a few closing comments. Andreas Rouvé: Thanks, Doug. Turning to slide 20. We are pleased with our fiscal 2015 results, which we achieved in a difficult foreign currency environment, and a solid Q4 to close out the year and provide momentum into 2016 where we expect continued sales and margin improvement and a seventh consecutive year of record performance, including record free cash flow and significant deleveraging. The pace of new product introductions will remain robust around the world, and we are investing more to improve our vitality rate. We continue to price where we can to offset negative currency impact. With our more, more, more focus, we are working hard to step up our organic sales growth rate in fiscal 2016, but will also support our acquisitions as they execute their growth and cross-selling plans. Fiscal 2016 will be another year of solid continuous improvement savings, along with focused capital spending projects to drive costs down, accelerate innovation, increase capacity and, thereby, accelerate organic growth. Spectrum Brands has a bright future as we execute our long-term growth strategy to deliver greater shareholder value. Thank you. And now to Dave for Q&A.

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

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

Hey, guys. Good morning.

Hey. Good morning, Bill. Andreas Rouvé: Good morning.

Can you just talk about trends at your largest customer? Because obviously there's been a ton of stuff in the press about kind of what they are doing. And then I think you want to wait until next quarter to really go into detail on the Battery turnaround. But is there anything you can share with us as kind of a sneak preview as to what you're going to do to reverse some of the weak recent trends? Andreas Rouvé: Yeah. Bill, let me just jump in. I think we typically do not want to talk about specific customers. But I think the point is there is a major turnaround plan, and I think we are – one of our, let me say, strategic priorities is to support that customer in achieving those growth targets. So we are working very close with them, be that in their online growth, be that in the brick-and-mortar, be that increasing store traffic. So, therefore, I would say we see that as a very encouraging trend, and we are also very positive about the opportunities for next year. Now, with regard to your second question on the Battery relaunch, you may want to understand that also potentially competition is listening to this call and, therefore, we want to wait a little bit longer before we go to market with the concepts. But again, if you follow our more, more, more strategy, it will not be surprising what you're going to see from us in the next couple of weeks.

Okay great. That's super helpful. And then it seems like there's been, not just for you guys but for everyone, like a disconnect between shipments and consumption. So how long do you think that's going to last? Meaning, I think the POS data is a lot better than some of the shipment data and obviously it varies category by category. So just curious how long that lasts and maybe some commentary on what you're seeing on retail trends in October? I know you're not selling sweaters, but it seems like there's a bunch of landmines out there on the retail side. So any commentary there would be helpful as well. Andreas Rouvé: Bill, we had mentioned in our prepared comments that we have walked away from unhealthy promotions. And again, I think this is closely linked to what you have mentioned with retailer inventories. And I always like to refer to it as a drug. It is very tempting to try to load retailer inventories and therefore push out your quarterly results or even your annual results and what we have very systematically focused, and again, we believe that's part of our strategic long-term sustainable growth strategy to deemphasize such shortsighted activities which cost you margin and at the end of the day are also going to impact negatively the next quarter. So we are seeing, for instance, a very strong October and we are seeing also a very positive trend going into the first quarter because, again, walking away from such, let me say, shortsighted promotional activities, which are really just a kind of phasing. And at the end of the day, I think this is also helping us foster a stronger partnership with retailers because, again, they are looking at GMROIC that means return on invested capital. And therefore, again, having lower inventory, they are going to improve their return rates; and therefore again we become a more strategic partner to them.

Okay. That's helpful. I mean, do you have any commentary on when that lapse, so like when do you think they are going to be done with the inventory cleanup? And I know you said October is great and the first quarter should be pretty solid as well but... Andreas Rouvé: If you just look, for instance, at our North American Pet results throughout the year, you will see that the major cleanup work which we did was already in the first half, and already in the second half we see a completely much stronger effect. So I would say in certain areas of our business that is already lapsing. So, that means we are already now on a very solid basis and therefore, I would say this, inventory reduction – yeah, process is more or less over.

Okay. Great. That's super helpful. Thank you.

Thank you. Our next question comes from the line of Olivia Tong with Bank of America Merrill Lynch. Your line is open.

Great. Thank you. I want to talk a little bit about organic growth, because it looks from the outlook that you'll be plus or minus in line with the rates that you saw last year. So can you talk through which segments get better to offset some of the challenges that will come with tougher comps in areas like Home and Garden and lapping obviously some of the distribution gains you've made in GBA? You obviously mentioned North American Battery stabilization, but we talked there a couple of other categories and how you think they trend relative to your fiscal 2015 performance. Andreas Rouvé: Yeah. Olivia, I think the – and that is really what makes us so positive. We see growth opportunities in every division. And the more, more, more strategy is really about gaining market share. That means pushing more cross listing, getting into channels which we have neglected in the past, and also the international expansion. So, yes, we do see, let me say, the major turnaround occurring in batteries but also in our record performance like, for instance, in small appliances. We are benefiting here from a continuous launch of innovation. That means we continuously bring to the market every six months, new products, be that in home appliances, be that in personal care, and we are doing and copying exactly the same approach and applying it also in the hardware section, for instance, where we are also now anniversarying or soon going to anniversary the exit of certain businesses in 2015. So, therefore, if you look at the core organic growth of our HHI division, they have been impacted by this exit in China, Canada, Mexico, and as soon as we're anniversarying that, you will see also there a very solid growth.

Got it. Thanks. And then, in the shaving category, Gillette and Schick, obviously, have some new activity coming in their systems business. And historically, how much has activity in Gillette and Schick impacted your business in the electric shaving category overall? And do you have anything new coming to sort of combat any potential disruption to the electric shaving category coming as a result of some of the plans that Gillette and Schick have? Andreas Rouvé: As you know, we are only in the electric appliance business and in the electric. And I think the beauty of our portfolio that we are very strong both in the shaving but also in the grooming area. Therefore, we are benefiting from both, be that if males like not to shave or if they like to shave. So, I think we are seeing that. And also, on the shaving side, we're seeing a nice kind of benefit that we have both the rotary and the foil. So, therefore, I would say we are quite nicely prepared.

Got it. Thanks. And then...

Actually, Olivia, sorry, this is Doug, too. And as you know, just a little bit of an add-on. We've had great innovation over the last 12 months in men's grooming that has been absolutely on trend and you saw that in our result this year.

Got it. And then, just lastly on gross margin, that was a lot better than we had expected. So, can you talk about some of the key drivers there? How much was related AAG, lower commodity costs and how you think about that going to fiscal 2016?

Yeah. We've been saying this consistently throughout the year too. Global Auto Care clearly is a strong contributor to the total company's margin and we expect as that annualizes up a couple hundred basis points. So, we're pleased with that. But we've seen really good mix across our businesses, and that's been driven in part by the exit activity that we've seen in HHI that Andreas mentioned. We've also seen it in some of the promotional activity that we've talked about all year that we're not participating in as aggressively and that would be in North America Batteries and in our North America Pet business. So, the mix has improved across the company as well. And then we had another really good year in continuous improvement and that was hit, as you know, offset by FX to a degree. But regardless, the business has done a really nice job pulling a lot of levers to improve margin and you should expect that from us going forward.

Great. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Jason Gere with KeyBanc. Your line is open.

Okay. Thanks, guys. Just a couple of questions, a couple of really kind of follow-on. I guess, just kind of adding on to Olivia's question on the margins, I mean, how you kind of see the margins playing out, I guess, in 2016 and taking into consideration how much more runway there is with some of the planned exits, so improving the profitability there. So, I was just wondering – you had I think almost 60 basis points or 70 basis points of operating margin this past year. How should we be thinking about that for the current year?

Yeah. I don't know that you'll hit that high end, the 70 basis points. It was a really fantastic year in margin expansion, again, despite FX and you should expect from us continued steady gross and EBITDA margin improvement year-on-year and it's the same levers that we have historically pulled and continued to be focused on: continuous improvement across the enterprise; pricing where it made sense and where we can get it; and really, really importantly, improve mix behind innovation across the business. So, all of those things should lead to a continuous steady improvement of margin over time. Andreas Rouvé: I think also if you consider the more, more, more strategy, where basically we are leveraging our infrastructure and, therefore, our fixed expenses more efficiently. And also, as part of the more, more, more strategy, we're also expanding our portfolio to go after higher price points. Therefore, also again, improving our mix per category.

Okay. So, I mean, is it fair to say that adjusted EBITDA, on an organic basis, double-digit growth last year that should not really wane from what we saw, I mean, in fiscal 2015?

Well...

Again, organic?

Yeah. No. I understand. And as you know, Jason, we don't guide it at those levels. But we do say is you should expected continued margin expansion from us on the base business and every business we buy we expect to grow margin.

Okay. That's fair. And then, I guess, thinking about the strategy in North America; and Andreas, you did a great job with that strategy fixing Europe. I mean, I know the baseball is over but, I guess, I was just trying to think of an analogy where how far along we are in terms of the improvements that we should see in North America whether, again, it's exiting profitable businesses and just trying to get the cost structure to be right-sized. So, I was just wondering what we saw last year – is there more growth to come? Are we kind of hitting the tail end of this? Andreas Rouvé: I think, and I mentioned it, we really are very strong in most of our business and really, we had challenges in Pets North America and in Batteries North America. I think all the other business are very solid and in a very nice momentum. So, with regard to Pet, I think we have already crossed the bottom. That means we are seeing a very nice momentum. And again, I mentioned earlier that October was very strong and that was, to a very big extent in the Pets. Also, in Batteries North America, we will start seeing those impacts, and also here, we had a very strong month of October. Of course, we don't want to extrapolate one month, but again, the point is we will follow exactly, as in Europe, as in other part of the world, the more, more, more strategy, where we are going to broaden our product portfolio, where we will go after more channels, and also, where, again, we will continue to push that international expansion. So, that was Batteries North America. We also see the turnaround, I would say, in the very near future.

Okay. Great. And here is the last question, and it's more of a quantification. Can you say how much of the organic sales in the fourth quarter included, I guess, the planned exits, the shipment delays? It sounds like October, I guess, got some of the shipments back that were kind of delayed there. So, I guess, I was just trying to quantify how much of these other kind of what I would call as temporary issues impacted that fourth quarter number and how we should think about that over the next couple of quarters, as well? Thank you.

Yeah. Thanks, Jason. The only one we gave any kind of specificity around was the HHI exits that we've talked about, and that was about 2.8% in the quarter on that business. For the Pet business, I would just look at their trends over the year-over-year. And you can't directly extrapolate from that or compute from that, but the underlying message is the business has turned and it's healthy and it will be growing now, going forward, in a healthier way with top and bottom line growth.

Okay. Operator, next question please.

Thank you. Our next question comes from the line of Zack Fadem with Wells Fargo. Your line is open.

Hi. Thanks. Good morning. Can you help me a little...

Hi, Zack.

Hi. Can you help me a little bit with the free cash flow guidance? Maybe some color around what's driving the year-over-year increase? Is it mostly layering in Auto Care and the other acquisitions or are you expecting improved cash flow in the core business as well?

Well, we certainly expect improved cash flow across the entire enterprise. Yes, so we expect to grow cash. On the legacy business, Global Auto Care certainly has an impact on the total, but recall that Global Auto Care, like us, generates a lot of its cash in what are our third and fourth quarters, mostly in the fourth quarter. So the annualization for them will be kind of normal as opposed to layering on a big impact because we've owned them for a shorter period of time. But you'll see improvements in working capital from us throughout the year. You obviously see cash flow growth from across the business, and that will be offset a little bit because we're stepping up capital expenditures a little bit next year. We're making these big aerosol capacity investments that we've talked about, we'll also be investing and continuing to invest in some vertical integration projects and behind our hearing aid battery business and other technologies. So we're doing a little more CapEx investment this year too. So, that'll be a little bit of a cash flow hit year-over-year.

Okay. And you had called out some operating improvements made in the legacy Pet business. I'm curious just what kind of improvements were made. Was this kind of a cost savings play or were there investments in top line as well? Andreas Rouvé: I think – and that is, of course, always very difficult to quantify. But we have done a very significant mix effect. That means walking away from business where we do not make any money and focusing instead of our core brands. And there also we are investing more both on the manufacturing side. That means we're stepping up our capital expenditure for stronger automation, for vertical integration, but also on the sales and marketing side we are investing more to strengthen our brands going forward.

Okay. And I realize the Q3 double-digit growth in Home and Garden was probably unsustainable. It's also a seasonal business. But I'm hoping you can explain the Q4 decline in a little bit more detail and maybe comment on what you think a realistic run rate or growth rate for next year could be?

Yeah. Zack, this is Doug. That particular business, as you know, has had a – like six years of really fantastic performance on the top line and it's grown in good weather and bad weather, but it is affected by weather. And you'll see that seasonality across the years also. So, in addition to growing behind terrific innovation and growing share, it has also been able to grow because of a really good weather year this year that just kind of hit at really nice times. And so the whole category did well. And then we picked up some additional benefits at the expense of some of our competition given some challenges in other parts of that category again. So what's realistic for next year? We've continue to have good innovation. We're rolling AccuShot out across the broader part of the portfolio and that did really well this year and that particular business is really well managed from a cost perspective and an efficiency perspective. So I think it's – you're not going to see double digit growth out of that business for the seventh year. But you will continue to see a very strong performance. Now, while it was basically flat on the top line in Q4, we did comp a terrific Q4 last year and we delivered substantial improvement in EBITDA margin this year.

Great. I really appreciate the color, guys. I'll hand it over.

Next question, operator?

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

Thanks, guys. Good morning.

Hi, Kevin.

Good morning, Kevin.

Good morning.

So I wanted to come back to the topic of organic sales. So your guidance looks like it implies like 2% to 3%, which is in line with the GDP type growth that the company has historically targeted. But arguably the portfolio is better now. You've made some nice acquisitions to your credit over the past few years. So, I just want to understand that better because we talked a lot about strategy qualitatively what you're going to do. But when should we see growth actually accelerate at the total company level? I'm understanding you have to cycle some of the more recent deals that you've done. So would you be disappointed if we don't see this portfolio sort of move from the 2% to 3% up to 3% to 4% beginning in the back half of this year and into next? Is that a fair characterization? Andreas Rouvé: Yes, absolutely. I think you are 100% right. We would be above GDP growth going forward. We do have, as you just flagged out yourself correctly, in the first half still some impact of the China, of the Mexico HHI exit activities from the first half where they'll be a little bit slower but we are accelerating the growth already.

Okay. All right. That's helpful. And then, Doug, some questions on the guidance, I guess, a few. What's your expectation that you're calling out roughly 200 basis points to the top line? Is it closer to 400 basis points to EBITDA from FX?

Let me just give you the numbers so you guys can bake it in your models. Recall we had $74 million of FX impact in 2015, and roughly half of that was transactional, and roughly half was translational. And as we move into 2016 – and recall also that we had a substantial portion of our transactional exposure hedged as we entered last year and we have a very robust hedging program, a continuous hedging program so we will see and we will continue to hedge as we've gone into 2016 and we will some hangover from that. So, we will see next year somewhere in the neighborhood of $70 million of additional earnings FX hit. And that mix will be more heavily transactional, maybe $45 million, $50 million, and the rest translational.

Okay. That's helpful. A couple more clarifications on the guidance, and then, just a reconciliation with what we're seeing in scan channel. So, free cash flow came in relatively in line with where the Street was expecting, but CapEx is ramped. Doug, anything you'd call out from a working capital perspective because it's sort of implicitly that cash flow from ops came in better than expected. I would say restructuring, the other piece, Doug. I guess, if you guys had to put a number on it, can you tell us how much has been realized to-date and then what sort of potentially the benefit is so we can sort of gauge there the contribution in 2016? So, those are the guidance questions. And then, also, if you can help me understand what's going on with kitchen appliances, houseware and kitchen appliances in Nielsen data which has been down double digits for a while. You guys reported a very strong number. But it's really a category issue too. So, maybe you can help us better understand some of the timing issues there and seemingly what's better growth online in the non-scan channels and kitchen appliances? And that'll do it for me. Thank you.

That was a lot. Okay. So, I'll leave the last part for Andreas, and I'll just hit on cash flow. We are expecting to step up CapEx, as we mentioned, and there are some specific projects that we want to invest in there. We've been saying that the portfolio that we have now is probably in a longer term, kind of 2% of sales CapEx investment business, which is a little above where the older part of the portfolio would have been in the past. And that reflects our desire to invest in innovation and our desire to continue to invest in continuous improvement and vertical integration across the business. So, we think those are very healthy investments and should pay off nicely over time. And obviously, we have internal measures that we rank our investments against them, prioritize those investments again. So we feel really good about those that we're putting in place. We do expect to continue to improve working capital as we go forward. There are several significant working capital initiatives that are not new, but they're – we continue to press across the businesses and we continue to expect to see working capital improvement. So, that's part of the offset to the step up in...

CapEx.

...our capital expenditure. Yes. Thank you. CapEx. And beyond that, integration and restructuring and related costs next year will be driven mostly by Global Auto Care, honestly. So we're early into those stages. We do have some plans around those. But beyond the guidance I gave, I'm going to leave those numbers where they are now for now. And I'll let Andreas answer the Nielsen data question. Andreas Rouvé: Yeah. I think the point is the part of our, more, more, more strategy is that we want to expand into more channels. And therefore Nielsen, as we mentioned covers only a part of the channel. So a big chunk of our growth is coming from Nielsen – channels which Nielsen is not covering. But in addition to that, there were a couple of very bright aggressive promotions by competition in the quarter and that obviously did have some negative impact. But as you know, we are all about EBITDA growth, so we are not about pushing short-term market share gains at the expense of EBITDA. So therefore we will focus on long-term sustainable growth initiatives and not at short-term market share gains.

Very good. Thank you.

Thank you. Our next question comes from the line of Bob Labick with CJS. Your line is open.

Good morning. This is actually Robert Majek filling in for Bob. Andreas Rouvé: Hi, Bob.

In prior calls you've discussed your long-term tax strategy and rate. Can you just kind of give us an update on your thoughts there and remind us what the current 35% rate is based on?

The current 35% rate is the one that we've historically used as we move to this period of NOLs. And the GAAP accounting around NOLs can be confusing. So we decided to pick a rate that we could – which is essentially for U.S. federal tax rate. That's how we got to that number historically now. As you know, our reported rate is in the low 20%s, and that includes the benefit of NOL usage. At some point, if we use the – we hope to use those NOLs over the next three to four years. And at some point, the valuation allowance that we have against those on the balance sheet will flip, and you'll see a bleed-through to the P&L, which will be a very big positive. We don't know exactly when that will happen, but at some point, it will. And then the effective tax rate will change. What you're seeing in our guidance for next year, the 10% to 15% has continued usage of the NOLs, which we expect to be able to use this year in the U.S. And also an important mix impact as Global Auto Care becomes fully into our year, and is reflected on a full-year basis, because most of its income is earned in the U.S., so we'll get an even bigger benefit from the NOLs during that period. That's where we are historically and this year, 2015 and where we expect to be next year, 2016. Setting all that aside, we are like all companies – all U.S. multinationals in our space. We are aggressively looking at tax planning opportunities across the entire business. And some of those things, because we're in an NOL position, we won't be able to be utilized until we work our way out of that. But nevertheless, you should count on us to continue to plan aggressively.

Thank you.

Thank you. Our next question comes from the line of Jim Chartier with Monness, Crespi & Hardt. You're line is open.

Good morning. Thanks for taking my questions. Andreas Rouvé: Hi, Jim.

Hi, Jim.

First, could you just talk about the aerosol capacity expansion? Is this more of a sales or margin opportunity? And then, can you touch on kind of how the cross-selling opportunities for the recently-acquired businesses in Pet and Global Auto Care are progressing? Do you expect to see a benefit in FY 2016? And then, finally, can you talk about Tell and where are you in terms of growing your presence in the U.S. light commercial market? Thank you. Andreas Rouvé: Okay. Let me start with the aerosol. Basically, we have been growing very rapidly with Home and Garden over the last couple of years, and in all fairness, we have reached maximum capacity. So, even if this is a strong seasonal product, we have to produce all year, even in the low season, to prepare ahead of the peak season which, obviously, is not very efficient from a working capital standpoint, but also, it sometimes leads to the situation that we are out of stock in the peak season. So, therefore, this is going to improve significantly, also our working capital strategy because we can produce as needed, and secondly, it will also allow us to satisfy the market demand better. In addition to that, we see also big opportunity utilizing this aerosol capabilities also in other categories like, for instance, in our Pet business. In our Pet business, also, we have a couple of products which are very well suited and which could benefit from being sold in aerosol canisters. So, therefore, this is going to help us reduce working capital, increase top-line and also, of course, it will have also cost improvement element to it. The second question if I got it right was on the cross listing of our acquisitions. We do see, for instance, in Europe with the IAMS, Eukanuba, a great opportunity. IAMS is a very strong brand, very strong, recognized in the mass channels. And in Europe, we could not use the Dingo brand, for instance, for our companion snacks and treats. So therefore we are utilizing, for instance, also those brands to push some of our legacy Pet products in Europe into those channels under the well-recognized brand. In addition to that, of course, the biggest opportunities on those cross-selling comes on the international arena where we have been partly weak in certain areas. Like, for instance, if you look at the Auto Care business, they have been in Latin America only present really in Mexico; in Europe, only in the UK; in Asia, also relatively weak, so therefore, we can take advantage of our presence to push that. Now in some cases, those activities will take some time because you need to prepare the supply chain, you need to prepare the products with all the different language versions, and so on. So therefore, we will start seeing that pick up, but it will not happen overnight. So that's more a kind of mid-term opportunities. Third question was on Tell. Here at Tell, we are also seeing the first nice benefits of putting these cross-listing activities, A, using the Tell footprint in the light commercial channel which again we can utilize stronger for our legacy products, but then also partly taking the Tell commercial products into some of our retail channels. So therefore, this integration is going also very well.

And Tell, I think you had initially said it was about $40 million revenue business...

That's right.

...and how quickly do you think that can grow?

Well, we've seen it. It's been an interesting year for us, because we've seen a cross-listing growth that Andreas talked about throughout the year. And it's been nice on that base of business. What we also saw, though, is oil pulled back radically and natural gas pulled back radically, but some of the important business for Tell was in those housing units that are used in the fracking areas of the country. And so, we've actually already begun to see some significant benefit from the cross-listing opportunities.

Great. Thanks and best of luck.

Thank you.

Hey. Operator, we have time for one more short, quick question, because we reached the top of the hour.

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

Good morning, gentlemen. In terms of the appetite for M&A, you guys have certainly strong cash flow. And is it more about tuck-ins as we go or more focused on integration for what you have?

Right now, Karru, I would say that it's more focused on integrating what we have and deleveraging. We'd like to get below four turns by this time next year and that's a big focus for cash flow usage over that period of time. And the businesses are very busy. As we've talked about Global Auto Care, that integration is well underway, but still a lot of work to do from the back office perspective and an IT infrastructure perspective and other things there. We have parts of the supply chain in the new Pet businesses that – especially in the Salix business that we are working very heavily on and the businesses are working very heavily on. So, we're going to probably spend the next 12 months or so really making sure we land all the acquisitions well, making sure that we begin accelerating the pace of more, more, more across the business and focus on deleveraging.

Thank you very much, guys. Appreciate it.

Thank you.

Thanks, Karru, and thanks to everybody. We have reached the top of the hour, and so we'll go ahead now and conclude our conference call. I certainly want to thank both Andreas and Doug this morning. And on behalf of Spectrum Brands, we all want to thank you for participating in our fiscal 2015 full year and fourth quarter earnings call. Have a good day and thanks again.

This concludes today conference call. You may now disconnect.