Spectrum Brands Holdings, Inc. (SPB) Q4 2021 Earnings Report, Transcript and Summary

Hello, thank you for standing by and welcome to the Q4 and Full Year 2021 Spectrum Brands Holdings, Inc. Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeremy Smeltser. Please go ahead.

Thank you, Josh. Good morning everyone. Welcome to Spectrum Brands Holdings Q4 and Full Year 2021 earnings conference call and webcast. I am Jeremy Smeltser, Chief Financial Officer, Spectrum Brands. As many of you know Kevin Kim left Spectrum for another opportunity at the end of Q4. So I will moderate today’s call. To help you follow our comments we have placed the slide presentation on the calendar page in the Investor Relations section of our website at spectrumbrands.com. This document will remain there following our call. Starting with Slide 2 of the presentation, our call will be led by David Maura, our Chairman and Chief Executive Officer; myself and Randy Lewis, our Chief Operating Officer. After their opening remarks, we will conduct the Q&A. Turning to Slides 3 and 4, our comments today include forward-looking statements which are based upon management’s current expectations, projections and assumptions and are, by nature, uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated November 12, 2021, and our most recent SEC filings and the Spectrum Brands Holdings’ most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement. Also, please note we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today’s press release and 8-K filing, which are both available on our website in the Investor Relations section. Finally we encourage you to listen to our remarks today along side with reading Spectrum Brands’ press release and 8-K issued today and our annual report on form 10-K once this is filed with the SEC. Now I will turn the call over to David.

Good morning. Thanks Jeremy. Good morning everyone. I appreciate everybody joining us today. On behalf of all of us at spectrum brands, I’m particularly pleased to report that full year fiscal 21 total company sales were $4.614 billion, an increase of $650 million over the period a year ago. Adjusted EBITDA was $689.2 million increasing $109 million over the period a year ago and our adjusted diluted EPS was $6.53. I’d like to start by thanking our 12,000 plus employee partners and the management team that delivered for us yet another successful year of top and bottom line growth. If you are part of Spectrum Brands, and you’re listening to this call, you should be very proud of what we’ve accomplished together. We have faced significant tariff costs, we’ve worked through a global pandemic, we have experienced unprecedented global supply chain challenges and inflation. And yet we still succeeded in executing on our strategic playbook and delivering on all our financial goals. Looking back at fiscal 21, we have a lot to be proud of. As we have continued to leverage our developing centers of excellence to allow our business units to focus their efforts on truly knowing our consumer. The focus is on efficiently using data to understand the needs of our end users in each category, meeting those needs through increased investment and new product innovation and telling that story to our consumers through enhanced brand messaging and product promotions. Our fiscal 21 and fourth quarter financial results reflect our continuing trend of delivering on commitments quarter-after-quarter while navigating the challenging supply chain environment we all face. We are confident in our ability to face these inflationary pressures and supply chain disruption headwinds with the same focus and discipline as we look forward to another successful year in fiscal 2022. Fiscal 21 has also been a transformative year for our company as we have completed a number of strategic transactions. In addition to the tuck in acquisitions in our Global Pet Care unit and our home and garden business as we previously disclosed, we have entered into an agreement to sell our HHI business for $4.3 billion in cash to ASSA ABLOY. The transaction is subject to the customary regulatory approvals in the U.S. and abroad, all of which are advancing nicely. Also, from a capital allocation perspective, we did repurchase 1.6 million shares of our common stock for approximately $125.8 million. Turning to slide 6, here we have an overview of the pro forma results total Spectrum Brands including HHI on a comparable basis to last year consistent with our earnings framework. In total pro forma spectrum branch results were in line with our earnings framework of mid teen top line growth with revenue actually accelerating 16.4% and we delivered adjusted EBITDA growth in the high teens at 18.8% growth. We also delivered adjusted free cash flow of $273 million as compared to our earnings framework of $260 to $280. We are extremely pleased to report that we grew revenue by $650 million this fiscal year, and we grew our adjusted EBITDA by $109 million delivering on the earnings framework, we communicated to our shareholders in a very challenging operating environment. We’re extremely proud of the global team for making this happen. We’ve maintained our strategy of investing in insights, innovation and advertising at an elevated level across each of our businesses despite significant inflation headwinds within the quarter. We experienced accelerated inflation levels in line with our expectations and we currently foresee these headwinds continuing throughout our fiscal 2022. The team has done an exceptional job of managing our profitability while continuing to invest in our future growth despite the challenges faced during the quarter. We remain committed to maintaining our focus on long term sustainable growth, and we will continue to invest in the business. Before we get further into this presentation, I’d like to remind everyone the beginning in the fourth quarter of fiscal 21, we are now classifying HHI’s results as discontinued operations due to the sale. Moving on to slide 7, we again delivered top and bottom line growth this quarter, including the impact of acquisitions. Organic sales, excluding the impact of FX and acquisitions actually decreased 3.4% in the quarter as we compare the results in the fourth quarter of fiscal 2020 which was an exceptionally high sales quarter due to recovery from COVID driven supply disruptions in the third quarter of fiscal 20. As a reminder, we did have six fewer shipping days in the fourth quarter versus the same period a year ago. The decrease in shipping days as well as the ongoing pandemic related global supply chain disruptions adversely impacted our sales this quarter. However, compared to the more normal operating environment of our fourth quarter of fiscal of 2019 these results actually represent double digit organic sales growth. Turning now to the bottom line. Fourth quarter net income from continuing operations was $6.1 million compared to a loss of $9.6 million during the fourth quarter of last year. Adjusted EBITDA for the quarter was $79 million, resulting from volume growth, pricing actions, our global productivity improvement program savings, and favorable comparisons to last year’s variable compensation change from stock to cash payouts. This was partially offset by pressure from inflation and incremental investments. We remain committed to maintaining our focus on long term sustainable growth and we will continue to invest in our businesses going forward. If I could get you to turn to slide 8, our balance sheet remains strong and we ended the year with net leverage of about 3.5 times, we have over $760 million in total liquidity. We were also able to fund $490 million worth of acquisitions during the past year without substantially increasing our leverage ratio. Also, from a capital allocation perspective, we did repurchase 1.6 million shares of our common stock for approximately $125.8 million. As we discussed on our HHI transaction announcement call in September, we expect to deleverage our balance sheet to approximately 2.5 times gross leveraged upon the closure of the HHI sale. We have subsequently adjusted our long term net leverage range to a more conservative 2 to 2.5 net leverage. Our capital allocation priorities continue to focus first on allocating capital internally to our highest return opportunities. This includes strengthening our brands through consumer insights, innovation, advertising, and marketing to drive vitality and profitable organic growth. Secondly, we plan to return cash to shareholders via dividends and opportunistic share repurchases. Third, we will continue with discipline strategic M&A transactions that are synergistic and help drive long term value creation. We believe this strategy will further enhance Spectrum’s veterans position as a Home Essentials company focused on meeting consumer demand through our greatest brands and innovative product offerings. Moving now to slide 9 and our high level fiscal 2022 earnings framework, we will continue to focus on executing our winning playbook, and we expect to grow the top line in the mid to high single digits. Adjusted EBITDA we plan to grow in the low single digits. This is after absorbing an expected additional level of inflation of around $230 million to $250 million. We expect the current step up in inflationary pressures to continue throughout fiscal 2022 and that the year-over-year impact will be more acute in our first half reporting of the year. We have implemented price increases in fiscal 21 and we have put in place further price actions in the first half of this year to counter these headwinds. Our goal is to achieve approximately 70% to 80% price coverage for inflation by the end of fiscal 22. But we do expect our first half margins to be pressured due to the timing of these price increases. One of our key focus areas during fiscal 22 will be improving product availability to meet the continued elevated demand across our business units as we expect the global supply chain constraints to remain in place. Now you’ll hear more from Jeremy on the financials and then Randy will come and provide you an update on additional business unit insights. So at this point, I’ll turn the call back over to you Jeremy.

Thanks, David. Let’s turn to slide 11, with a review of Q4 results from continuing operations, beginning with net sales. Net sales increased 2.8% excluding the impact of $5.1 million of favorable foreign exchange and acquisition sales of 41.2 million. Organic net sales decreased 3.4% as fourth quarter fiscal 20 was an exceptionally high sales quarter for both Global Pet Care and home and garden due to recovery after COVID driven supply disruptions in Q3 fiscal 20. HPC registered another quarter of growth. Results were also negatively impacted by the six fewer shipping days in the current quarter versus fourth quarter last year as David mentioned. Gross profit increased $4 million and gross margins of 34.1% decreased 40 basis points driven by commodity and freight inflation, partially offset by a favorable pricing, mix and improve productivity from the company’s global productivity improvement program. Overall, given the inflationary pressures we are pleased with the gross margin performance in the quarter. SG&A expense of $218.2 million increased 8.8% at 28.8% of net sales with the dollar increase driven by acquisitions, higher marketing investments and inflation. Operating income declined from $30.5 million to a loss of 4 million driven by higher restructuring and transaction related expenses. Net income and diluted earnings per share increase due to a tax benefit driven primarily by the release of certain valuation allowances. Adjusted diluted EPS decreased 2.6% due to the decline in operating income from higher SG&A. Adjusted EBITDA increased 8.5% primarily driven by volume growth requisitions as well as productivity improvements and positive pricing, partially offsetting margin pressure from commodity and freight inflation. Recall that we had a change in our incentive compensation payout methodology during Q4 of last year. The results of that a reduction of stock based compensation expense and consolidated adjusted EBITDA of $12.7 million during the fourth quarter of fiscal 20. Turning to slide 12, Q4 interest expense from continuing operations of $20.1 million decreased 4.2 million. Cash taxes during the quarter of $6.3 million were $1.1 million lower than last year. Depreciation and amortization from continuing operations of $29.6 million was $2.9 million higher than the prior year. Separately share and incentive based compensation increased by $8.2 million from last year to $7.5 million driven by a change to incentive compensation payout methodology in last year’s fourth quarter, which resulted in a reduction of stock based comp expense for Q4 and the full year in fiscal 20. Cash payments for transactions were 6 million down from 6.2 million last year. Restructuring and related payments in the fourth quarter were $13.6 million versus $10.3 million last year. Moving to the balance sheet, the company had a cash balance of $188 million and approximately $575 million available on its $600 million cash flow revolver. Debt outstanding was approximately $2.5 billion consisting of approximately $2 billion of senior unsecured notes, nearly $400 million in term loans and just over $100 million in finance, leases and other obligations. Additionally, net leverage was 3.5 times at the end of the fiscal 2021. Capital expenditures were $23.2 million in the quarter versus $16.5 million last year. Let’s turn now to slide 13. Here we have an overview of full year continuing operations results. Net sales increased 14.3%, including an impact of $49.5 million of favorable foreign exchange and acquisition sales of $122.7 million organic net sales increased 7.8% as we experienced growth across all businesses with double digit organic growth in our home and personal care business. The sales performance was driven by strong consumer demand in the first half of fiscal 21 and favorable comparisons to COVID related closures across most regions in fiscal 20. Gross profit increased $157 million and gross margins at 34.5% percent increased 100 basis points driven by favorable pricing, mix and improve productivity from the company’s GPIP program, partially offset by commodity and freight inflation. We are very pleased with the gross margin performance despite the inflationary headwinds. Adjusted EBITDA increased 21% primarily driven by volume growth, including acquisitions as well as productivity improvements and positive pricing, partially offset by margin pressure from commodity and freight inflation. Turning now to slide 14 and our expectations for fiscal 2022. We currently expect mid to high single digit reported net sales growth in 2022 with foreign exchange expected to have a slightly positive impact based upon current rates. Adjusted EBITDA is expected to grow low single digits. This includes continued benefits from our GPIP program and approximately eight months of results from the recent rejuvenate transaction, which last fiscal year generated about $66 million in full year revenue. EBITDA is expected to grow despite incremental inflation headwinds of $230 million to $250 million, which are mostly offset by annualization of current pricing actions, and planned further price increases as well as additional productivity actions. From a phasing perspective, we expect first half and specifically the first quarter to be most negatively impacted by inflation pressures on a net basis. Depreciation and amortization is expected to be between $120 million and $130 million, including stock based comp of approximately $25 million to $30 million. Full year interest expense is expected to be between $80 million and $90 million, including approximately $5 million of non cash items. Structuring and transaction related cash spending is expected to be between $55 million and $60 million. Total expenditures are expected to be between $95 million and $105 million. We ended fiscal 21 with approximately $725 million of usable federal NOLs and expect to use substantially all of them to offset the gain on the sale of HHI. We are projecting to be a U.S. taxpayer in fiscal 22. Cash taxes are expected to be between $20 million and $30 million for adjusted EPS with a tax rate of 25% including state taxes. Regarding our capital allocation strategy after the closure of the HHI sale we’re targeting a new near term gross leverage target with approximately 2.5 times. After full deployment of the HHI proceeds, we are targeting 2 to 2.5 time net leverage for our long term target. Lastly, we plan to continue to invest behind our brands at the higher rates to support the execution of our strategy. Moving to slide 15, I’d like to spend a few moments discussing some modeling considerations for fiscal 22 to assist in navigating the complexity of discontinued operations for HHI as compared to our continuing operations presentation of financial results in our earnings framework, and as the year progresses. First, GAAP accounting for discontinued operations will allow us to allocate about $40 million to $45 million of interest to discontinued operations for the full year fiscal 22. Our actual expected interest expense reduction is about $20 million higher than that on an annual basis after plan debt reductions. Continuing operations will carry about $20 million higher interest expense that we would expect in fiscal 23, all else being equal. Second, as compared to our historical allocation approach to HHI technical GAAP accounting will not allow us to allocate approximately $20 million of center lead cost to discontinued operations in our GAAP financials. We will adjust for this in our adjusted EBITDA presentation for continuing operations. After the sale closes, we would expect to be reimbursed for these costs under TSA and our contractual agreements with the buyer for periods ranging from 6 to 24 months depending on the enabling function and region of the world. Post those TSAs essays we will address any remaining stranded costs consistent with our approach and our past material asset sales. Next, our year-over-year results are expected to be stronger in the second half of fiscal 22 as compared to the first half, essentially opposite of our quarter results in fiscal 21 due to the timing of the impact of inflation hitting our cost lines, and then continued increasing pricing actions taking effect as the year progresses. And finally, from a cash flow and working capital perspective, a few notable items to point out. First HHI’s free cash flow will not be presented in continuing operations for any period reported. Second, continuing operations free cash flow will be reduced by the $20 million of interest that I mentioned earlier. Third, we expect heavier than normal investments and capital expenditures primarily due to our investments in our new S/4 HANA SAP upgrade program of about $30 million to $40 million, as well as heavier cash spend in restructuring and acquisition and integration costs due to the sale of HHI, the S/4 HANA program as well as the completion of the global Pet Care DC transition in the U.S. And finally, inventory levels are very difficult to predict this early in the year given the global supply chain challenges and consumer demands. We will maintain a bias toward fill rates as needed to support our retail customers, and thus the timing of potential inventory reductions after last year’s investments and inventory is uncertain. Now I’ll turn it to Randy for a more detailed look at our operations.

Thanks, Jeremy. And thank you all for joining us this morning. My comments today will focus on a review of each business unit to provide details on the underlying performance drivers of our operating results. And I will also update you on the current overall supply chain and cost environment as well as the progress on our global productivity improvement program. Overall, we continue to utilize our operating model to navigate the headwinds in the current business environment. While our results remain volatile from quarter-to-quarter, due to the impact of COVID-19 we believe the fundamentals of our product categories remain very strong. Consumer demand in our categories continues to be positive, and our brands continue to perform very well in their spaces. Now let’s dive into the specifics of each business. Starting with home and personal care, which is slide 17, reported in organic net sales increased 2.3%, 1.1% respectively, adjusted EBITDA decreased 36.1% to $14.5 million. Net sales were driven by continued recovery in the hair and garment care offsetting a slight decline in kitchen appliances primarily due to global supply chain delays, as well as an expected slowing of consumer demand in that category. The U.S. markets were most acutely impacted by transportation delays, but this was offset by strong growth in EMEA and Latin America. Lower EBITDA was driven by increased freight expense, continued investments in marketing and advertising as well as input cost inflation. This was partially offset by pricing actions, higher volumes in productivity improvements. Q4 represents the ninth consecutive quarter of the year-on-year top line growth for this business. Performance was driven by double digit growth and garment care products and moderate growth in hair appliances despite the significant transportation delays. Our consistent confirm commercial wins over the last two years and continued investments give us confidence in our plans to continue growing share and shelf space with our key retailers. As we outlined in our previous calls inflationary headwinds, as well as continued marketing investments in HPC in Q4 is only partially offset by our pricing and supplier partner initiatives. This will put pressure on margins however, we continue to work to mitigate the inflation impact as we enter fiscal 22. The timing of additional pricing action to address these increasing inflation pressures and supply challenges will further pressure margins in Q1. Although our long term focus in 2022 will remain on a consumer led insights driven new product platform with incremental sales opportunities in the upcoming holiday season our immediate focus is on improving supply availability as we continue to face capacity and transportation challenges. Moving to Global Pet Care, which is slide 18 reported net sales grew 9.1% while organic net sales declined just under 1% due to six fewer shipping days in Q4 of fiscal 21 versus fiscal 20 as well as impacts from supply chain constraints. Adjusted EBITDA grew 7.4% driven primarily by the impacts of acquisitions. Profits were pressured by higher freight and input cost inflation, partially offset by productivity improvements and pricing actions. We were able to overcome the third quarter fulfillment challenges from transitioning new 3PL provider at one of our U.S. distribution centers. That DC output level steadily improved throughout the quarter and finished above last year and at target rates by the end of the quarter. Q4 represented a record 12 consecutive quarter of revenue growth for this business. All top categories grew, and sales to all top channels grew as well with the continued resurgence in the pet specialty brick and mortar channel as consumers have returned in store shopping. This is a great sign for the pet industry in general, as it’s indicative of the strong consumer engagement that exists in the outlook for the category. EBITDA was driven by the top line growth including the impact of acquisitions. Profits were pressured by higher freight and input costs inflation partially offset by productivity improvements and pricing actions. We remain confident that 2022 and beyond will benefit from the continued execution of our strategy, which is centered around introducing unique innovation in order to drive demand for our portfolio of leading brands. The team is particularly excited to see the continued strong demand for the consumables products in this portfolio. As we have discussed before, we’ve seen an influx of new pet parents into companion animal categories, and new hobbyists into the aquatics and reptile categories. This bodes well for all the repeatably purchased items in our portfolio, like dog and cat, chews and treats, grooming tools and aids, bird and small animal foods, pet stain and odor removers and aquatic food filtration and water care products. These products typically carry strong margins and represent a significant portion of our overall portfolio. This is just another reason why we remain bullish about the continued growth of this business. And finally home and garden, which is slide 19. Fourth quarter reported net sales decreased 7.3% and adjusted EBITDA decreased 19.4% However, the full year reporting net sales increased over 10% and the adjusted EBITDA increased 10.6% closing a very successful year for this business. Fourth quarter net sales showed a decline across controls, household, insecticides and repellents as last year’s quarterly revenue was historically high, driven by the recovery of COVID related supply disruptions in Q3 of fiscal 20. The impact was compounded by six fewer shipping days in Q4 of fiscal 21. The sales were also lower due to strategic exits of low margin contract manufacturing business and non strategic low velocity skews. Fourth quarter sales were 28% ahead of more normal Q4 fiscal 19 driven by organic growth from strong consumer demand and continued market share gains. Our market data indicates that during Q4 we had double digit POS growth and in the 2021 season, we increased our overall leading market share position by an estimated 50 basis points. We’re also very excited about our new rejuvenate cleaning business which continues to perform in line with expectations as we fully integrated into our operations. EBITDA decrease was driven by lower volumes and higher manufacturing and distribution costs partially offset by pricing and productivity improvements. The business continues to see higher product costs from raw materials and freight. The business has announced another round of price increases that go into effect in this quarter to offset that cost pressure. We are also targeting further pricing action in the first half to offset additional expected inflation. We remain committed to our strategy to invest more resources to deliver truly innovative consumer solutions and tell our story around the brands of Spectracide, Cutter, Hot Shot, EcoLogic and now rejuvenate. We believe our continued strategic investments will further enhance our mission to be the recognized market leader in providing consumers the best solutions for conquering nature’s challenges and enjoying life. Now let’s turn to our internal growth and efficiency efforts with our global productivity improvement program on slide 20. We remain focused on continued success, execution of this program as we complete our global operating model transformation. We are committed to our strategy of reinvesting these savings back into the business to drive long term sustainable organic growth. We are reaffirming our gross savings target of $200 million of savings by the end of fiscal 2022. Our teams have already captured over 175 million of gross savings since the program’s inception and this has helped us offset some of the adverse impacts of tariffs inflation. These amounts include the HHI business and adjusting for continuing operations only the savings are about $150 million in total, with approximately $135 million achieved through the end of fiscal 2021. As we had anticipated inflationary pressure further accelerated in this quarter and impacted our results in a meaningful way although these inflationary trends are broad based with an industry wide impact, our quarterly results reflect the various actions we have undertaken to offset these cost pressures. We are leveraging the many advantages of our new global operating model and utilizing the enhanced tools developed through our GPIP program to launch a coordinated response to these market forces. The GPIP program is driving further productivity improvements in our processes, and helping us partner with our suppliers to offset some of the inflation. With the current constrained global supply chain environment we expect these inflationary pressures to accelerate further in the current quarter. We have also implemented further pricing increases with our retail partners in Q4 and are actively engaged in taking additional price in the first half of FY 22 to offset further incremental inflation. While we will continue to make incremental investments to growth initiatives such as consumer insights, R&D and marketing, across each of the businesses, we believe supply chain improvement and resiliency must continue to be an area of focus for us in fiscal 22 as we work to improve product availability, while simultaneously finding ways to mitigate the cost pressures coming through the global supply chain. To end my section, I want to acknowledge another quarter of fantastic progress on our operating culture and our strategic initiatives. And as sincerely thank our 12,000 plus employees for all that they’re doing to make us a better, faster and stronger Spectrum Brands. Now back to David.

Thank you very much, Randy. Thanks, Jeremy, and for all of you on the call thanks for joining us today. I’d like to take just a few minutes here to recap the key takeaways here on slide 22. First, our fourth quarter financial results include a very successful fiscal 21 for us where we saw a 14% growth in sales and 21% growth in adjusted EBITDA from continuing operations. The progress from our Spectrum family to improve our business is nothing short of remarkable. We’ve once again delivered strong results in the face of globally constrained supply chains and an accelerating inflation backdrop by continuing to invest in our long term growth and find ways to offset the inflationary pressures through both price and productivity. We’ve demonstrated great discipline in our capital allocation process as well as business operations. Our global productivity improvement program is delivering the savings we committed to and we continue to reinvest those savings into long term growth of the company. Secondly, we are driving a strategic shift for Spectrum Brands with the sale of our HHI business for $4.3 billion. As mentioned earlier, the process is progressing well and it’s going through the customary regulatory review. We expect to deleverage the balance sheet to approximately 2.5 times gross leverage upon the closure of the HHI sale. And we have adjusted our long term average leverage target range to a more conservative 2 to 2.5 times net leverage. In addition, we expect to have approximately $2 billion of capital to deploy and to maintain this target leverage range. Third, the momentum in our operating businesses remains positive despite inflationary pressures and global supply constraints. We expect inflation to accelerate in fiscal 2022. We’ve already launched a coordinated response to this through pricing actions and productivity programs. As referenced earlier in this call, we are targeting mid to high single digit net sales growth and low single digit EBITDA growth for fiscal 2022. I am personally very optimistic about the future of our businesses and I’m proud of the way the team has come together to face the many challenges during fiscal 21. As I mentioned earlier, the company’s culture has shifted to focus more than ever on the long term growth and profitability of our businesses. And now we continue to face the challenge global supply chain, this management team has demonstrated the discipline to operate efficiently and maintain profitability while continuing to invest in the future. On the demand side of the equation, we have experienced the sustained demand shift to a higher level of consumption and our Global Pet Care and home and garden businesses. We expect to continue this strong growth momentum in fiscal 2022. Macroeconomic environment remains favorable as we enter the peak holiday season, which bodes well for our home and personal care businesses. Overall, we are a more efficient company today. And we are reinvesting much of the savings from our global productivity improvement program back into driving the growth of our three businesses. In summary, we maintain a favorable outlook for fiscal 22 and beyond despite the various challenges over the next couple of quarters. The continued energy of our teams and the investments we’re making in sights, innovation and advertising leave me enthusiastic about our new product development pipeline, and our expected new launches in fiscal 22 and fiscal 2023. The future of Spectrum Brands is genuinely bright as we continue to make living better at home. I want to again thank all of our employees from our frontline workers in the factories to the distribution centers, to the many other teams around the world that have been working diligently from home. I also want to give a special thanks to our supply chain team. You have done an amazing job securing materials, products and containers, allowing us to bring products to market as we continue to win new business across our platforms. I’m extremely grateful for all the sacrifices our Spectrum Brands employees have made to navigate our company successfully through these challenging times. I thank you for your time. I thank you for your hard work. Thank you for your continuing support. I’d like to now turn the call back over to Jeremy for any questions you may have.

Thanks, David. Hey, Josh, can you pick up the Q&A for us please?

Thank you. [Operator Instructions] Our first question comes from Robert Labick with CJS Securities. You may proceed with your question.

Good morning. Congratulations on great execution, obviously a tough environment. I wanted to ask you one kind of capital allocation question to start and then get into more operating questions. But the number one question we’re getting from clients right now is about reinvestment opportunities and once you get the cash in “will it burn a hole in their pockets?” How patient will management be? And then kind of related, might there be additional portfolio restructuring as well? So could you just kind of, I know we’ve talked about this in the past, but just maybe remind people, how you feel about burning a hole in your pocket with cash and all that kind of stuff, please?

Well, we are definitely not going to burn any holes in our pocket with cash. We’ve worked far too hard over the last three years to really fix the operation of this company to really fix the culture, to really create a serving leadership environment where we inspire, empower and encourage our employees. Look, I think is, I’m one of the largest individual shareholders of the company. I am personally gratified with the last 36 months for the work and I think if you’re an outside investor or you’re new to the story, while I apologize that, with the sale of HHI, there is some noise in the numbers, I think the story should become a lot clearer as just one of our business units has been crystallized for $4.3 billion of value and that was more than our market cap at the time of that announcement. We will completely defeat our balance sheet with HHI. I mean, I think everyone knows, we only have about $2.5 billion in gross debt. And, when that deal closes, we can either pay all that debt down or we can leave some cash in the checking account. But I mean, given the current valuation of the business, we still feel like our shares are materially undervalued given the underlying growth rates, particularly in our pet and home and garden businesses. And so, if we were to close that deal tomorrow, we would probably continue to buy shares as you see us doing so currently. And listen, I think, you’re not wrong, I mean, eventually, we will execute growth, M&A, we really want to build a material business pet, home and garden. We believe that we understand those businesses. We believe we have very attractive platforms, very strong brands and highly incentivized employees that are excited about taking market share and launching new products and really building amazing businesses. And so that’s where I see kind of things going. Clearly the next couple of months, we’ll be working close in HHI. But again, I think, the underlying businesses, particularly pet, home and garden are great growth assets with good margin structures. And I think shareholders should be able to start to see the value there. And I think that would hopefully lead to what I’ve been working so hard for with the team to get an expanded multiple, on our stock, our currency. It remains undervalued in my opinion. I’ll continue to look for solutions and possible opportunities to create value with our home and personal care business. As many of you know I got involved in that business personally back in 05. It’s near and dear to my heart and we want to continue investing there. We’ve seen some great market share wins across the globe. We’ve got a very dedicated team there. And I’m looking forward to seeing where we can go with that. So I think that hits most of your question. If not, please let me know what I failed to answer.

No, that’s great. That’s very helpful. And it hit everything I was looking for. So shifting to kind of operations and this likely varies by category. But given the supply chain issues, widely talked about, can you discuss your ability to satisfy demand or sales constrained in any way by the supply chain?

I’ll let Randy and Jeremy add further color, but there’s no question that we could be driving a whole lot more sales, if we had all the inventory we needed, and we continued, that’s an everyday battle to get our fill rates up. And we’ve materially invested heavily in inventory and the rest of it, but yes, the demand side of the equation remains exceedingly robust. But, these inflationary and supply chain challenges are, I’ve never seen stuff like this over the last 20 years. It’s an exceedingly volatile environment and that’s why I have so much pride in the team for navigating it but Randy you want to add some color?

Yes. Good morning, Bob. As David said, it’s an omni present issue for us. And I would say it’s pretty consistent across each of the businesses and each of the categories within the business. So to answer your question, I mean, we’re not quantifying a number for you at this point, but I can tell you that we believe that we were materially suppressed on the top line in the last couple quarters for sure just based upon supply, and we expect that that’s going to continue probably through the midpoint of the fiscal year to some degree. So yes it’s a daily battle.

Thanks and one last for me, I’ll get back in queue, but it’s related to that question and some companies are holding back on advertising promotion to avoid over-stimulating demand that they can’t meet. So part of the question is where do you fit in terms of that, and also, just talk about your advertising personal budget and reinvestment in brands in general, because I know, it’s been a multiyear process of increasing the reinvestment to build brand equity and build the brands over time. So maybe if you can tie those two questions if they made sense together, that would be great?

I’ll take the headline and then Randy will give you the real answer. But we’ve worked way too hard over the last three years, to build a culture that leans in, that invests the things in three to five year terms instead of 90 day terms. We’ve made so many sacrifices to create productivity dollars, to reinvest in our brand equities, to innovate and launch new product and look I think for most companies right now, that is probably the greatest temptation. If you look at the volatility in your supply chains, and massive amount inflation that’s coming at you, those are the levers that people are going to be tempted to pull back on. We are not going to do that. We’ve come way too far. We’ve made way too much progress. We’re investing to win long term. That’s all I got. Randy over to you.

Bob, I completely agree with that statement. We had our first litmus test on our commitment and conviction to this new strategy back in the spring of 2020. And we’re faced with a global pandemic and the possibility of at that point complete meltdown, and maybe massive liquidity issues facing companies like ours. And our board and our CEO made a decision to say not only are we going to stay to our committed investment strategy, we’re going to double it, we’re going to double down and we brought an incremental $10 million in that next couple of quarters. And we plan to stick to that strategy. We believe it’s strengthened our new operating model. And we can pick up a lot of ground on competitors during this timeframe. So once these eventually transitory issues are gone we’re in a better stronger platform to grow from there.

Thank you. Our next question comes from Nik Modi with RBC Capital Markets. You may proceed with your question.

Yes, thanks. Good morning, everyone. Just a question on supply chain. We’ve done a lot of work at RBC on just looking at port congestion and looks like it could be decongested by mid to late 2022. I was curious on if you guys have a viewpoint on when you think that’ll happen. That’s just kind of a quick question. The broader question just on organic growth for fiscal 2022, if you could just provide some context, kind of what you’re thinking, what you think the categories are going to grow any perspective around market share developments, any call around, that would be really helpful.

So, Nik, morning, this is Randy, I’ll take the first part of the question and see if Jeremy wants to jump in. But we thought you guys did an excellent job on the quantitative assessment of how long it will take to decongest, especially the West Coast ports. And I would say that our opinion from talking with our suppliers and our global partners is not materially different than that. We would see sometime mid fiscal year for us as being kind of a good situation and we think it could continue into summer and early fall. But one thing that we know is that pretty much every prediction on supply chain performance over the last 12 months has been wrong three months later. So we are focusing on maintaining flexibility and speed to be able to react to the situation. So we don’t have a crystal ball. But if we kind of aligned with you on that.

Yes, I agree with everything Randy said on fiscal 22 kind of categories. What I would tell you is that the inflation that we talked about, and the pricing, we need to strategically get to offset that majority of that pricing is in place and has been received in the marketplace and goes into effect continuing to Q1 into Q2. We’re a bit cautious on not just really our pricing, increase needs but really overall inflationary impacts on consumers about what that means for demand in fiscal 22 and beyond. And so I would tell you that the majority of the organic net sales built into our forecast for F22 really is price. There’s some volume in there. I think we’ve been conservative on that if consumer demand continues at the current rates that we see today, but it is something I think we should all be thinking about as it relates the overall pocketbook consumers.

I think where we are today and we’re trying to telegraph that pretty clearly is the phasing of this year will actually be reversed to fiscal 2021. We’re going to spend Q1, Q2 really figuring out where that demand unit versus dollar is. And so unfortunately, we have to pay a price. We don’t have a choice. The inflation has been that aggressive anywhere we can get productivity, we will, and we’ve got a lot of plans to go do that. But yes, look, I think we expect the very good full fiscal year when it all comes together and very much back half weighted. But at the same time I would think you should expect higher growth out of our pet, home and garden businesses, and a little less growth out of HBC you’re modeling the year.

Thank you. Our next question comes from Peter Grom with UBS. You may proceed with your question.

Good morning, everyone and congrats on a great quarter. So maybe just a start David, I know you mentioned the deal continues to progress nicely in the release and maybe I missed this. But I don’t think there was an update on timing in your remarks. So could you maybe provide some more concrete update on the process, particularly as [Indiscernible] seems committed to this calendar Q4 close and then I have a follow up.

No, you’re right. I didn’t mention timing, because I don’t want to. I can’t control the United States government. But it’s proceeding well and I expected to close and hopefully it closes sooner rather than later. That’s really all I can tell you.

And then Jeremy, I was hoping that we could unpack the low to mid single digit adjusted EBITDA guidance for fiscal 22, which is very impressive. I guess what are the key components bridging within that number, particularly, as you think about this $230 million to $250 million inflation, which is almost 2x, when you mentioned last quarter, even with HHI, moving out of the business? So maybe can you help us understand what’s driving the low to mid single digit growth the GPIP benefits, synergies rejuvenate pricing. And then lastly and maybe more importantly, you’ve done a tremendous job of building credibility the past few years by delivering and in most cases over delivering on your targets. And I know it’s a very dynamic and environment. But would it be fair to say that this guidance range embed some cushion? Should things either get or go against you from a cost or current perspective? Thanks.

Yes. So I mean, the first part of your question, look the most important thing, no doubt about is inflation and price. Those are those material items that every company like us is facing right now as you face into, whether it’s fiscal or calendar year 22. Obviously, we’re one of the first to go out and since we’re a 930 year end, but yes, it’s been dynamic. I mean, on a continuing operations basis, our inflation in fiscal 21, was about $83 million - $85 million in the same buckets of the 230 to 250 that we expect in F22. So you’re looking at $325 million give or take on a $3 billion top line business continuing operations, so I mean, that is significant. I’ve never seen anything like that in particular as quickly as it’s come on us. And as you’ve seen in Q3 in particular, our Q4 results we’re behind it a bit from a cost perspective versus price and as David just mentioned, that’s going to be similar story for Q1. We would expect to ramp that up, as we get into Q2 and certainly Q3 and Q4. And hopefully, if things remain stable which Randy made the point that one thing you know about assumptions on inflation right now, if you’ve lived the last year and businesses like ours, and certainly up to analyzing businesses like ours is, we’re wrong, because things are going to change. The very good news I think our shareholders should take solace in is that as I said, the majority of the pricing we need, based on the inflation that we see as of today and projecting to the year is actually in place communicated etc. and coming online. So that’s an important thing. I think the rest will come from just overall volume. As I mentioned earlier we’ve been I think, conservative on volume, a little more price and the organic. Volume could be better, could support incremental inflation, could drive higher EBITDA frankly. We’ll just have to see how the year progresses. I think beyond that Rejuvenate acquisition is important. I said in my prepared remarks, it was $66 million of fiscal full year revenue for F21. But we only owned it about four months. So that means we got eight months come in and as you know I have discussed, as we have all discussed, the margins on that business are higher than the home and garden business in total. So that’s a nice tailwind for us as we head into fiscal 22. Honestly, those are the biggest material items. So I won’t go any deeper than that right now, just in the interest of time, because we’re coming up on the hour here.

Thank you. And our next question comes from Christopher Carey with Wells Fargo Securities. You may proceed with your question.

I just wanted to follow up on the pricing comment. So I think it was EBITDA specific 70% to 80% of inflation should be covered by year end. So number one is that. So I guess I’m just trying to confirm what exactly that means. So in the $230 billion to $250 billion of incremental inflation are you saying that you expect pricing to cover about $180 million of that over the course of the fiscal year? Are you saying that you expect pricing by the time you get to Q4 to be caught up, can you just help me dimensionalize that comment?

Yes. I’m going to let Randy take it. But I mean, look, it’s a very fluid and dynamic situation out here at the moment. And we are confident in 2021, 2022, and we’re giving you guidance. But look, it’s, you can’t just raise price without looking at consumer demand. Right now there’s a very favorable macro economic backdrop. The consumers got $2 trillion - $2.5 trillion of excess liquidity. And the consumer so far continues to spend, despite price increases that’s just a fact. It’s the reality of the current environment. We are long term thinkers. We want to build brands. We want to take market share, and we want to be the winner number one player, three or five years from now. And so we want to spend this next quarter making sure we get the right balance because there’s dollars in those units. And we want, there’s obviously lag effects. You can get hit with input cost inflation. It takes you time to get a price increase and that continues your margins. But if you take price too fast, you take it too far ahead we just don’t want to degradation that demand faster than it needs to and so we’re working on that equilibrium, if you will. But let me let Randy provide better details.

Yes, Chris, I think you’re generally thinking of things correctly. We just have a lot of moving pieces across various businesses, regions, and in categories. Some of them are a little less price sensitive than others, some of them brands playing in different competitive environments. And so we’re working very well with our retail partners and all of the businesses to try and make sure that we’re doing the right thing for them and for us, as well as for our consumers. Again, as David said, with a long term focus. So I think the headline is, we’re saying we will not, we do not anticipate being able to price for all the inflation. We will have to do other things in areas of productivity and other partnerships, innovation, etc, to address that over the long term.

Thanks a lot just conscious of time. I’ll jump back in. thank you.

Thank you. And our next question comes from Ian Zaffino with Oppenheimer. You may proceed with your question.

Hi, great. I guess we’re going to be a dead horse here. But the 70% 80% pricing inflation, is that spread out for the pro rata across your categories? Are there any categories where it might be higher than that or some verticals that are lower than that?

So from a subcategory quarry perspective, there are definitely some wide fluctuations. From a business unit perspective the variations are smaller. But I think it’s been mentioned here, we feel that overall, our pricing power with consumers is probably strongest in Global Pet Care, followed by home and garden, and then followed by HPC. But all three businesses have done an excellent job in our mind of communicating well with our retail customers, good partnerships. It’s all about strategizing together to figure out what the right way is to handle these macro issues coming at us and all three businesses are getting price that I think we’re pleased with thus far.

Thank you very much.

Thanks Ian. I think Josh, we have time for one more question.

Yes. And our last question comes from Carla Casella with JP Morgan. You may proceed with your question.

Hi, great. On the $230 million and $250 million of cost increases can you just talk about the materials that are driving the most of that and if this quarter that we just test is the peak, the cost increases for those if there are some there are still on the increasing track?

Yes. Let me start and Randy will give you some details on materials. So I would tell you that from an experience perspective, Q4 was the largest we’ve experienced in the marketplace. But given the long lead times we’re experiencing right now a lot of that actual dollar inflation was in inventory on the Q4 balance sheet and will actually hit the P&L in Q1, which is why we’ve said so often today that Q1 will be challenged. Opposite of last year materials overall are the highest component of the inflation with ocean freight being second. Last year, as you’ll recall, ocean freight was the highest with materials being second. So on the overall material break down kind of gives some color on what hits us the most. Randy will walk through that.

Yes, Carla I would say think as Jeremy said, think of the materials being more than half 60%, two thirds or so of that total transportation being the remaining pieces of it. And then what’s driving it our top commodities would include kind of the normal things you would expect for a consumer packaged goods company such as ours. It’s crude oil, natural gas, steel, liner board, plastics, HDPE, etc. So, it’s pretty much all of the main drivers that you would anticipate.

Thank you so much for that additional color.

Thanks, Carla. And thanks, everybody for joining us. We appreciate your attention today. I’ll be available today as well as next week for follow up calls and hope you all have a great Friday and a great weekend. Take care.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.