Spectrum Brands Holdings, Inc. (SPB) Q1 2022 Earnings Report, Transcript and Summary

And thank you for standing by. Welcome to the Q1 2022 Spectrum Brands Holdings, Inc. Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And if there are any questions during the call [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jeremy Smeltser, Executive Vice President and Chief Financial Officer. Mr. Smeltser, the floor is yours.

Thanks, Chris. Good morning, everyone. Welcome to Spectrum Brands Holdings ' Q1 2022 earnings conference call and webcast. I'm Jeremy Smeltser, CFO of Spectrum Brands, and I will moderate today's call. To help you follow our comments, we have placed the 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. Turning to 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 the opening remarks, we will conduct a 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 risks, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 4th, 2022, and our most recent SEC filings in 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. I will now turn the call over to David Maura.

Hey. Thanks, Jeremy. Good morning, everyone, and welcome to our first quarter of 2022 earnings update. Thanks everybody for joining us this morning. Look, I'm going to kick the call off with an overview of the company's performance and our capital allocation priorities. After that, Jeremy is going to provide a more detailed financial update, and then Randy will come on and give an operational update, including all the different business unit results. If I could turn everyone's attention to Slide 6, look, these are very exciting times for Spectrum Brands. We've now begun our evolution into a faster growing, higher margin pure play Global Pet and Home & Garden company. We believe we can create meaningful shareholder value with this transformation. Our first quarter went largely as expected, with continued top-line growth, while margins contracted as input costs inflation exceeded price increases. We have additional pricing actions in place and more targeted to offset the unprecedented inflation we're currently experiencing. We continue to expect to achieve our earnings framework for the full year of mid to high single-digit net sales growth and low single digit adjusted EBITDA growth. Consumer demand, and retailer interest in our products and categories remain positive. We also continue to work towards the closing of the sale of our Hardware and Home Improvement segment to ASSA ABLOY for $4.3 billion. We remain confident that this transaction will close this year. And we're pleased to say that strong demand persists in HHI's end markets. Moving to Slide 7, the Tristar acquisition, which we announced this morning, will be transformational for our Home and Personal Care segment. The ability to leverage the studio content creation, DRTV, and direct-to - consumer business model of Tristar's talented team should enhance some of our legacy brands and help us drive continued market share gains with our combined slate of new product offerings. The increased scale and profitability of the combined HPC and Tristar business will now enable us to create an independent global appliances company poised for faster growth and expanding margins and it creates a platform for further acquisitions in this space. We firmly believe that this value creation opportunity will create tremendous value to our shareholders and we look forward to updating our investors on the progress of the separation of this business from our holding company as this year progresses. Slide 8. Our capital allocation priorities will continue to focus on allocating capital internally to our highest return opportunities. We believe this strategy has been paying off for us as we continue to drive growth through product vitality across all our businesses. Secondly, we plan to continue to return cash to shareholders via dividends and opportunistic share repurchases. During the quarter, we repurchased approximately $1.1 million shares of our common stock for $110 million, more recently, we concluded the prior quarter's $150 million buyback plan as approved by the board of directors. At our recent board meeting this week, we have authorized the repurchase of another $150 million of our common stock as we plan to continue to opportunistically repurchase our shares. As we get closer to the closure of the HHI transaction, we may accelerate our share repurchase activity. Third, we will continue to pursue disciplined and strategic M&A transactions that are both synergistic and help drive long term value creation. Today's announcement of the Tristar acquisition accelerates our plans to create an independent appliance company. We believe this separation and the resulting pure play Pet -- Global Pet and Home and Garden company should lead to a re-rating of the multiple of Spectrum Brands common stock, and create tremendous shareholder value. As we have discussed on previous calls, we expect to deleverage our balance sheet to approximately 2.5 times gross leverage upon the closure of the HHI sale. Additionally, we have adjusted our long-term net leverage ratio to a more conservative two to two- and 1/2-times net leverage. Before I turn the call over to Jeremy, I would like to acknowledge the contributions of our global teams whose efforts have helped to minimize the impact of these supply chain headwinds to our consumers, retail partners, and the business overall. Our supply chain team enabled by our center-led globalized operating model has found creative ways to deliver our products to our customers. I'd like to thank all of our global employee partners and the management teams for their tireless efforts in the face of many challenges that this company's overcome over the last several years. This team's success continues to demonstrate our winning culture and the successful adoption of our operating model and honestly inspires me every day. Now you'll hear more from Jeremy on the financials. Over to you, Jeremy.

Thanks, David. Turning to Slide 10 and a review of Q1 results from continuing operations, beginning with net sales. Net sales increased 2.9%, excluding the impact of $7.3 million of unfavorable foreign exchange and acquisition sales of $16.5 million. Organic net sales increased 1.6% despite COVID -related supply disruptions and overall supply chain constraints. Gross profit decreased $33.5 million and gross margin of 29%, declined 500 basis points from a year ago due to accelerated freight and input costs, inflation, pacing ahead of price increases timing, partially offset by productivity improvements. SG&A expense of $203.5 million, increased 5.7% at 27% of net sales with the dollar increase driven by higher distribution and transportation costs and higher advertising and marketing investments. The operating loss of $23.8 million was driven by the gross margin decrease and higher SG&A I mentioned. The declines in GAAP net income and diluted earnings per share were primarily driven by the operating loss and prior-year gains from our previous investments in Energizer common stock. Adjusted diluted EPS declined to a loss of $0.06 in the quarter, driven by lower operating income from the gross margin decline from inflation, and higher SG&A. Adjusted EBITDA was $49.3 million declining due to accelerated freight and input costs, pacing ahead of pricing adjustments and higher distribution costs, partially offset by improved productivity. Turning to Slide 11. Q1 interest expense from continuing operations of $21.8 million decreased $1.3 million due to our lower cost of debt. Cash taxes during the quarter of $6.6 million were $400 thousand higher than last year. Appreciation and amortization from continuing operations of $25.4 million was $1.7 million lower than the prior year. And separately, share and incentive-based compensation decreased from $6.9 million last year to $5.6 million this year. Cash payments for transactions were $17.9 million, up from $12.1 million last year. Restructuring and related payments were $12.3 million, versus $10.9 million last year. Moving to the balance sheet, the company had a quarter-end cash balance of $205 million and $116 million available on its $600 million cash flow revolver. Total debt outstanding was approximately $3 billion, consisting of $2 billion of senior unsecured notes, $862 million of term loans and revolver draws, and $100 million of finance leases, and other obligations. Net leverage was 4.8 times compared to 3.5 times at the end of the previous quarter as the trailing 12-month EBITDA declined, and we had an increased outstanding balance on our revolver facility to support working capital requirements from continued supply disruptions, as well as share repurchases. During the quarter, as David mentioned, the company repurchased approximately 1.1 million shares for a $110 million. This accumulates to a total repurchase of $125.9 million of the $150 million, 10b5-1 share repurchase contract through the end of the first quarter. We have since completed the purchase of the remaining shares under that contract. Capital expenditures were $14.1 million in Q1 versus $7.6 million last year, mainly due to higher investments in our SAP implementation. Turning to Slide 12 now on our expectations for fiscal '22. We continue to expect mid-to-high single-digit reported net sales growth with foreign exchange expected to have a slightly negative impact based upon current rates. We expect 310 to $330 million of total inflation during the year up from a previous range of $230 million to $250 million and intend to offset the higher inflation through additional pricing and cost management actions as needed. Despite the additional inflation, we are maintained our adjusted EBITDA framework of low single-digit growth. This includes continued benefits from our GPIP program. Impact of annualization of current pricing actions and planned further price increases, productivity actions, and approximately eight months of results from the recent rejuvenate transaction, which last year, generated about $66 million in full-year revenue. From a phasing perspective, we continue to expect the first half to be most negatively impacted by inflation pressures on a net basis. Depreciation and amortization are expected to be between $120 and $130 million, including stock-based comp of approximately 25 to 30 million. Full year interest expense is expected to be between $80 and $90 million, including approximately $5 million of non-cash items. Restructuring and transaction-related cash spending is expected to be between $55 and $60 million and capex (ph) are expected to be between $95 and $105 million. We ended 2021 with approximately $725 million of usable federal NOLs and expect to use substantially all of them to offset a portion of the gain on the sale of HHI. We are projecting to be a us taxpayer in fiscal '22. Cash taxes are expected to be between $25 million and $35 million. For adjusted EPS, we use a tax rate of 25%, including state taxes. Regarding our capital allocation strategy, after the closure of the HHI sale. We're targeting a near term gross leverage target of 2.5 times. And after full deployment of the HHI proceeds, we are targeting 2 to 2.5 times 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 13, I'd like to remind everyone of some of the 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. First, our continuing operations will carry about $20 million higher interest expense in our fiscal '22 than we would expect in fiscal '23, all else being equal, as GAAP accounting for discontinued operations will only allow us to allocate about $40 to $45 million of interest to discontinued operations for the full year, while our actual expected interest expense reduction is about $20 million higher than that on an annual basis after our plan, debt reductions. Next, our year-over-year results are expected to be stronger in the second half of the year as compared to the first half, essentially opposite of our quarterly results in fiscal 2021, due to the timing of the impact of inflation in our -- 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. HHI's free cash flow will not be presented in continuing operations for any period reported. Continuing operations free cash flow will be reduced by the $20 million of interest that I mentioned earlier. And we do still expect heavier than normal investments in CAPEX primarily due to our investments in our new S/4 HANA program of about $30 million to $40 million. And finally, working capital levels remained very difficult to predict given the global supply chain challenges and consumer demand. Now I will turn it to Randy for a more detailed look at our operations and business unit results.

Thanks, Jeremy. And thank you all for joining us this morning. I'll review our first quarter operations results and business unit performance. Before I do that, I would like to spend a few minutes to summarize some of the macroeconomic factors at play and provide an update on the cost environment that we're operating in. Moving to slide 15. As David mentioned earlier in the presentation, the overall supply chain and cost environment remained very challenging in the first quarter. Inflation remained high per our expectation, but the supply chain issues were more severe than we anticipated. First, some of our agent suppliers experienced stricter COVID related shutdowns and caused availability issues. This negatively impacted shipments in the quarter especially in our Global Pet Care business. Second, COVID surges in some U.S. communities caused labor disruptions resulting in inefficiencies that drove our distribution costs higher. Third, the labor issues are also impacting our customers. And that led to material shipping delays in the quarter related to the customer's ability to receive and or pick up shipments that were ordered based on real demand. And the overall global supply chain also remained strained with consumer demand outpacing global shipments capacity, especially in the high-traffic holiday months. This led to longer lead times and in turn, required us to make inventory investments to ensure continuity of supply for our customers. In light of these continued ocean shipment capacity issues, we expect the freight rates to remain higher for a longer period in fiscal '22. This expectation of higher for longer freight costs is also a [Indiscernible] contributor to our increased inflationary outlook for fiscal '22. Moving to Slide 16, I'd like to highlight the various countermeasures we're putting in place to succeed in these very challenging times. First and foremost, our focus remains on executing our pricing actions in the marketplaces. The good news is that over 80% of the price increases required to cover projected inflation for our earnings framework have already been either fully implemented with for communicated to our customers with the remaining amounts in various stages of finalization. Another important factor is improving product availability. This includes enhancing our supply chain resiliency by finding alternative sources of supply to ensure continuity in cases of further supply facility shutdowns, as well as contract extensions critical to suppliers to avoid future disruptions. We're simultaneously focusing on reducing the impact of ocean freight inflation by optimizing our shipping lanes to minimize exposure to volatile spot rates. And finally, we continue to focus on our customer collaboration and operational execution to ensure we can react quickly to changing customer dynamics. All of these actions are enabled by leveraging our operating model transformation towards one global supply chain with collaboration across our business units and regions. As David outlined earlier, our business is demonstrating its durability and our operating strategy is proving effective and helping us actively manage through today's headwinds as we enjoy continued strong consumer demand for our product categories. The first quarter reflected another period of organic sales growth for the total company as we continue to work to improve our delivery performance and provide more consistent service levels, which is earnings as positive feedback with our customers. These efforts in addition to our combined commitment to long-term commercial strategies and operational investments helped drive another quarter of top line growth. Now let's give them the specifics for each business. I'll start with Home and Personal Care, which is Slide 17. Reported inorganic net sales increased 0.3% and 1.7% respectively. Adjusted EBITDA decreased to $27.4 million. Revenue growth in the quarter was driven by the Latin American region with strong holiday season sales performance and expanded distribution. And this was tempered by product availability issues and comparison to prior year COVID-related demand increases in other regions. Lower adjusted EBITDA margins were driven by accelerated freight and input cost inflation ahead of incremental pricing actions and partially offset by productivity improvements and continued investments in marketing and new product development initiatives. The first quarter represented the 10th consecutive quarter of year-over-year top-line growth for our appliance division. Performance was driven by the continued post - COVID recovery of garment care products, which posted double-digit growth and growth in small kitchen appliances. The launch of our new breakfast collection, referred to as [Indiscernible] under the Russell Hobbs brand in the international markets, was helping us achieve growth in the important breakfast category. The recent launch of our new two-in-one iron and steamer is driving growth in the garment segment, which is perfectly timed for the rebound of that category. Consumer demand remains strong throughout the holiday season, the product availability was impacted due to delayed shipments early in the quarter. Product availability improved later in the quarter and helped cap a strong holiday season overall. Our consistent commercial wins over the last two years and strategic investments give us confidence in our plans to continue to grow share and shelf space in our key markets. As we outlined on previous calls, inflationary headwinds are only partially offset by earlier waves of pricing in the first quarter. Net input costs inflation for appliances was actually slightly better than expected in the first quarter as we were able to delay certain supplier cost increases. The pricing actions that were planned to ramp up in the second quarter to avoid disruption of our peak sales quarter have now been increased accordingly. The timing of these additional pricing actions to address increased inflation and supply challenges will pressure margins through the first half of the fiscal year. Our immediate focus in 2022 continues to be improving supply availability while offsetting the input costs, inflation impact through strategic pricing and supplier partnerships. Moving to Global Pet Care, which is Slide 18, our pet care business had a good quarter for revenue performance was reported an organic net sales growth of 9.7% and 7.3% respectively. Higher net sales were attributable to double-digit growth in aquatics and continued strong growth in companion animal. The business had growth in all regions and in all product categories as the fundamentals of this business remained very strong. This quarter represented a record 13 consecutive quarter for revenue growth for the business. As to consumer demand stayed strong, U.S. and Canada sales increased from growth in brick-and-mortar channels, as consumers continue to return to in-store shopping. The Latin American region grew double-digits as we improve product availability for the region. And double-digit organic growth in Asia was aided by recently secured import license to begin selling our Tetra brand of fish food products in China. We've largely completed the amortized integration into the Global Pet Care business. And we're now fully leveraging our global expertise in the category to accelerate pharmacologic growth. A great example of this is that our good boy brand now holds the number one position in the dog shoes. In the U.K. The growth was achieved despite operating in a very challenging supply environment. First, the business faced supply disruptions with a key product supplier in Asia due to temporary government enforced COVID -related shutdowns, which had a material impact on the first quarter revenue. We found additional sources of supply for these products and have shifted significant volumes to these new sources. This change, as well as other supply chain resiliency activities, have now increased our available capacity for this product line by over 30% as compared to before the shutdown. These actions have begun to resolve the product availability issues and we anticipate complete resolution by late next quarter. Secondly, global supply chain challenges continued in the first quarter as freight capacity remained limited and lead times remain longer than normal. Lastly, our competitive labor market led to higher turnover and labor inefficiency, which reduced shipping capacity for the business. Some of these challenges are expected to persist for the near future. Adjusted EBITDA declined to $38.7 million. Lower EBITDA in the quarter was driven by increased freight and input costs inflation, pacing ahead of timing of incremental pricing actions. Labor inflation, labor turnover, and associated inefficiencies drove incremental operating costs in the quarter, while we maintained our strategy of investing in marketing in new product initiatives. This was partially offset by operational productivity improvements. Pricing is expected to ramp up in the second half and price coverage should improve in the third quarter as we put in place additional pricing actions to offset the incremental costs. Despite the short-term challenges, we remain confident that 2022 and beyond will benefit from the influx of new pet parents into the companion animal categories and the new hobbyists into the aquatic and reptile categories that we've seen over the past years. Our long-term focus remains on 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 consumable’s products within our portfolio. These tend to carry strong margins, and they now represent over 80% of our total revenue. These category dynamics and our strategic focus to capitalize on the trends across our full product portfolio is why we remain very bullish about the continued growth of this business. And finally, Home & Garden which is Slide 19, our Home & Garden business actually executed very well in this quarter. The quarter, as you know, is predominantly focused on preparation and staging for the highly seasonal Home & Garden business, which starts to ramp up in the second fiscal quarter. In preparation for what we expect to be a record year, the team did a great job during the quarter of securing necessary chemicals, active ingredients, and critical packaging components, which have been in short global supply. Reported net sales decreased 8.5%. Organic net sales declined 18% in the first quarter. Sales were impacted by supply chain and customer-related transportation challenges that shifted some product deliveries past the quarter-end. First quarter organic net sales showed a decline across all product categories as last year's revenue was historically high, driven by low year-end retailer inventories at the end of fiscal '20 and an early inventory build by customers in the first quarter of fiscal '21. Our first quarter organic net sales this year actually increased 47% compared to a more normal first quarter of fiscal '20. This increase was driven by organic growth from strong consumer demand and increased distribution over the time period, with double-digit growth across controls, household insecticides, and repelling categories. While the first quarter represents a very small portion of the annual consumer activity in this business, consumer demand was strong as we continue to experience double-digit POS growth in each product category. Adjusted EBITDA was a loss of $7.3 million driven by lower volume, freight, and input cost inflations, continued marketing and product development investments, and shipment timing of lower-margin spring displays. This was partially offset by pricing actions and productivity improvements. We continue to see higher product costs for raw materials, labor, and freight. To offset this additional pressure, we are implementing another round of price increases in this business that will go into effect this quarter. Integration of the rejuvenate business is progressing well, and we have achieved the milestone of systems integration in the first quarter. Distribution integration and a marketing refresh will be completed in the second quarter. And we are confident we are setting up to rejuvenate business for long-term success as part of Spectrum Brands. We are excited about the distribution gains. We've already secured existing and new customer accounts. We continue to invest in delivering true innovative consumer solutions in our home and garden business and to tell our story around the brands of Spectracide, hotshot cutter, EcoLogic, and rejuvenate. We are confident that our continued strategic investments will further enhance our mission to be a recognized market leader in providing consumers the best solutions to convert nature's challenges and enjoying life. Our product development driven by consumer insights continues to drive our new product portfolio. This year, we're particularly excited about our new grasping weed killer products. We've introduced new ready-to-use skews in our easy-to-use one hand operated, Flip & Go sprayer. And for the consumers who prefer to mix their own spray, we've introduced an easier to use AccuMeasure concentrate product. These innovations have led to significant distribution gains in fiscal year 2022. Now let's turn to our internal growth and efficiency efforts on our Global Productivity Improvement Program, which is on Slide 20. The GPIP continues to be on track, and we remain focused on executing our plan to complete our global operating model transformation. as communicated on the call in November, the savings target, excluding HHI, is approximately $150 million of which over a $140 million has been achieved thus far. To end my section, I want to thank all of our global employees in the progress we've made in our operating model, cultural advancements, and our strategic initiatives. And as David said earlier, these are truly exciting times as we make living better at home by creating a better, stronger, faster Spectrum Brands. Now back to you, David.

Thank you very much, Randy. Thanks, Jeremy. And thank you, everyone, for joining us on the call today. Look, there was a lot of news in today's announcements, and given that we've covered a lot on the call, let me conclude with the key takeaways here on Slide 22. First of all, we continue to make great progress on our strategic objective of creating a higher margin, faster growing Spectrum Brands. A business focused on Pet Care and Home & Garden consumable products. The HHI divestitures progressing well with the teams focused on supporting our friends at ASSA ABLOY with the regulatory reviews. With the recent announcement of the Tristar acquisition, we're taking a significant step towards our objective of creating a separate pure-play global platform with a powerful portfolio of leading brands in the Home and Personal Care appliance space. Secondly, our business fundamentals remain solid with consumer demand continuing to be strong in our product categories. We continue to post sales growth despite all the supply chain challenges as our investments in marketing and new product innovations are translating into success in the marketplace. Although our first quarter EBITDA reflects a temporary impact of inflation, pacing ahead of pricing, we expect our pricing coverage of inflation to improve with each sequential quarter. Third, despite the incremental inflation headwinds, we remain committed to our earnings framework for fiscal '22. We are delivering on our Global Productivity Improvement Program efficiency targets, and we continue to leverage our operating model to execute our winning playbook that has helped us exceed our commitments over the previous few quarters. Although we are now projecting higher inflation impact for the full year of $310 million to $330 million, we are putting in additional pricing actions now and other 10 countermeasures to deliver low single-digit EBITDA growth for the year. We remain encouraged by our consumer demand of our products and our retail partners enthusiasm for the categories, brands, and new product launches we have planned throughout the year. As I've mentioned on previous calls, we are committed to managing the business for the long-term success of the Company. And I'm very proud of the way the team has come together to manage the business through this challenging supply chain environment. I remain confident that this management team will continue to execute, with tremendous discipline to drive the profitability of our company in fiscal '22 and beyond. I want to close by saying thanks once again to our employees who are navigating our company successfully through these unprecedented times. I want you to know that the future of the company is bright and we continue to make Spectrum Brands better. And we continue to make living better at home for our customers around the world. I want to turn the call back over to Jeremy now for questions. Thank you.

Thanks, David. Hey, Chris let's go ahead and start the Q&A. Can you queue that up, please?

Thank you, sir. As a reminder to ask a question [Operator Instructions] And our first question comes from Peter Grom of UBS. Your line is open.

Hey. Good morning, guys.

Good morning, Peter.

So maybe just to start on the HPC transaction, can you maybe provide some more context or background on the deal? How does the timing of HHI closing impact your decision around spending HPC if at all? And then I guess more broadly, can you just give us some thoughts to -- what determines how you're going to structure that deal? How you decide on timing? And then David, just more broadly, what in your opinion is the right value for these new appliances business?

I appreciate all the questions. Look, we're really focused on creating value for our stakeholders. And we've got two phenomenal businesses in our holding company, our Global Pet Care business, and our Home and Garden business. And these tend to be much faster growing, much higher margin businesses. And when I look at the valuations being preyed in the private sector of recently 14x, 15x, 16x EBITDA for assets similar to this, I think it's behooving upon me as a fiduciary to think about how to create value for our stockholders. And so, look, the HHI business, we bought it in 2012, we were really good stewards of it. We had to look each other in the eye and say, hey, can we make a real leapfrog or an exponential uplift in earnings from where we've taken it, and we decided that our friends at ASSA ABLOY are going to be able to take this to the next level globally. And we think it's a great partnership for our employees there and Tim and the team is doing a great job there. The end markets remain robust and they're managing through this inflation cycle better than a lot of people. So, hats off to HHI. I've said in the past that once that $4.3 billion comes in the door, priority one is deleveraging the balance sheet, but we do want to redeploy that to roll up what we believe is a very fragmented Home & Garden and Global Pet supply industry. And we really believe we can create a lot of value for shareholders there. I think if people really look at our business today, the holding company today is trading at about seven times EBITDA pro forma the HHI business. And that's why I have been aggressive in buying back our shares. Because I do believe once appliances have spun off, our multiple can be re-rated much more in line with where I believe a Home & Garden and a Pet business of our caliber should trade, so that's what I'm trying to do to create wealth for our stockholders. In terms of the Appliance business, I, for some time, believe that small kitchen electrics needs to consolidate. There’re too many players. The margins are too thin and the business needs true innovation and real direct-to-consumer capability. Keith and the team at Tri -Starr, or an amazing group of talented people that have studios, film production facilities. They are excellent and making DRTV promotions, running infomercials. And they have a direct-to-consumer business is about a third of their revenue. There is higher-margin business they've built a bunch of brands. They've grown about 85% over the last few years. We are really looking to on burden them with their back-office situation. But frankly learned from them, with their front office capabilities. And I believe this marriage is going to excite the growth rates of our legacy assets, and it gives me now the critical mass proforma $1.7, $1.8 billion business with $140, $150 million in EBITDA. And then going higher, that gives you a pathway to either IPO the business out of our holding Company, merge with another existing public Company, or in fact, spin it off. But with the ink just got dry in the purchase agreement. I'm going to need a couple of months to figure that out with the Board of Directors, but we do hope to move expeditiously and update our investors on what we're -- what path we will choose later this year. I hope that answers most of your questions. Obviously, I can't get into the valuation of a specific business unit.

Totally understand. And maybe just following up on the comment around the proceeds for HHI. Last call, it sounded like buybacks will be big use and obviously the stock has retreated quite a bit here. And I know either you or Jeremy mentioned that as the timing or gets closer for HHI, you may accelerate buybacks. But can you maybe help us understand what that buyback program may look like?

Look, we just bought a 150 million bucks of stock the other day. And actually, the share price declining is good for us. We like when we're buying back stock for the stock to be cheaper. So, if you don't believe in our strategy, we're happy to take your shares and shrink that float. Look, clearly, as we get closer to $4.3 billion coming over the transom, if I happen to believe that our Pet and Home & Garden businesses are worth 14- or 15-times EBITDA and the market wants to continue to value our company around seven times, the greatest single use of wealth creation that I could possibly do is continue to buy stock. And so, look, let's get there. We're in a regulatory review. We are very confident the deal will close, but it's going to take a lot of work. We don't have any specific date to give you that -- We can say, this is the day that it's going to close, but on the day of closing, I want to de -lever and depending on where our share prices and how the market is valuing us, we will then communicate to you what we're doing there on that front. But yes, look, clearly the stock is around here and we've got 3.5 plus billion of net cash proceeds or somewhere there about, we will -- we will buy a lot more shares.

Got it. Thanks so much and best of luck.

Hey, thank you. Appreciate your questions.

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

Good morning. Thanks. Lots of exciting stuff going on.

Good morning, Bob.

I wanted to start, I think you highlighted this in one of the slides, but maybe dig in a little more into we'll call it your inflation playbook, and just how you're planning on mitigating through this year, just get a little more detail. Maybe you could talk about how and where you decide which products, how you decide on prices and where you can pass them on? How long does it take for the last 20% of the price increases to move through the channel, just maybe the staging? And then lastly, what's been the competitive response so far to pricing? Obviously, the inflationary impacts are not unique to Spectrum. It's a macro event, so how are competitors reacting as well?

Look, I'll do the top, the big summary and then Randy and Jeremy do the specifics. We are living through an unprecedented time. Let's just face it. Some of these input costs, they're incredible. We have instances where our freight is up 10 times from where it used to be, and we have some input costs that up 45%. And so, we're not excited about having to raise prices. Our retailers [Indiscernible] and we don't think inflation at this level is great for the consumer. What I would say is the consumer appears to be plus with cash still. Our demand across the board continued to be quite strong. We're all still trying to deal with a fragmented and broken supply chain. That's taking longer than any of us wish to fix. But we -- unfortunately, pricing is what we need to do to restore our margin structure. That's our fiduciary duty. I'm hell-bent on making that happen. And we're going to show you margin improvement with every quarter we've got left to this year. And I'll pass it to Randy and Jeremy for further detail.

Yeah. Bob, you asked about the mechanics and really, it's an item level profitability analysis that has to do with all of the inflow of increased costs, as David said, price increases in this environment are really kind of the last thing that we want to spend our time on, but it's what we have to and so we're simply taking the pricing whereas necessary to do the right thing for the business. And you asked about the last 20%. I don't want to imply that there's a 20% tail there that's going to take a long time to get to it. That's just the timing associated with the new visibility to longer-term freight costs, et c, that are going to extend deeper into the fiscal year than what we thought. So, I don't anticipate there to be any executional -- increased executional risk with that. As it relates to competitive response as David said, this is a brand-new playbook and so most of our buyers, most of our retail partners, and most of our competitors are in the same boat where we're figuring this out as we go along, and we're all trying to do the right thing for the categories and the consumers. So, I don't really think there's anything material with regards to competitive response in most of our businesses. We're depending upon our brand positions where there's leading and following. But there's not a big dynamic that's impacting our business there.

Okay. Great. That's very helpful. And then just one more, and I'll turn it back in queue. In terms of the HPC numbers. Obviously, you gave us the combined [Indiscernible] numbers and we know the calendar 21 margins for HPC were impacted by inflation. What do you see as -- just kind of remind us there's been a lot of change? What is a normalized margin for the core -- of the core Spectrum HPC segment before the Tristar going forward just to try to think about what -- once margins do normalize the earnings power of the new entity?

Listen, we used to run this business 10% margins. I think the industry should operate at 10% or better. Our legacy business, I think we got our margins a size 12, maybe 14% when everything was going in the right direction. We're under some pressure right now, but I don't see any reason why we can't return to a 10% EBITDA margin. Jeremy, Randy, if you want to give more color on that.

Yeah, I agree. If you go back for the significant part of inflation starting to hit us -- hitting us last year, Bob, I think we had an LTM quarter. We posted that we were $125 million of EBITDA on an LTM basis and that, to David's point, was getting us in the low double-digits. Obviously, inflation's hitting us. So, you're seeing a couple of quarters that get down into the low to mid-single-digits. But with the actions we have in place, even for this year, I think we can get into the higher single-digits and we'll see what happens with inflation and demand next year. But all in through the cycle, ups and downs, I feel like it's a low double-digit, 10%, to David's point, kind of margin business with the current product mix.

Okay, that's super. That sounds great. Thank you very much. I'll get back in queue.

Thank you.

Thanks, Bob.

Thank you. Our next question comes from Chris Carey of Wells Fargo Securities. Your line is open.

Hey, good morning.

Morning sir, how are you.

Am not too bad. Happy it's Friday. Can we can talk about like leverage? There is a lot of cash potentially in but a bit delayed because your overview. Obviously for the Appliance and deal there's going to be additional leverage. It's a little tough to see just with HHI and disc ops and not in continuing cash. Maybe just say HHI doesn't closed for another 6 months. And I don't know if it will be on that, but how does this all come together with your balance sheet on like, how do you view the proforma exposure, if you will, over the next 3 to 6 months as some of these things are unfolding.

Yeah. Look, you're hitting on the correct points. At the current time, leverage is going higher, because we're buying back stock. And we're in an environment where the supply chain has been elongated much longer than I would like. And it's consumed a lot of working capital on the balance sheet. I am putting my foot down on that, and we're going to take a lot of action to cure that going forward. I think a lot of companies in the CPG space have been solely focused on fill rate, fill rate, fill rate because the supply chain has been so bad. But we also need to pay attention to balance sheets and get those healthier too. And so that will be a theme over the next couple of quarters. I think the other thing you need to take into consideration as you're modeling is obviously the EBITDA drop, which we anticipated for Q1 and then much less severe in Q2. Our earnings on an LTM basis should start to recover between Q2 and Q3 and then quite frankly, we have a pretty large uptick once pricing is in place and we've covered every -- all the inflation. We have a very -- we're very confident in it, but we have a very strong second half, and it happens to be, as we've said earlier in the call, the exact inverse pattern of what happened in the fiscal period a year ago. And so, you've got two things going on. You've got the debt ticking up a little bit, you've got the earnings under pressure because of the inflation. Look, I personally think we hit that inflection point somewhere around June. And then I think life gets a lot better. To your question, look, I think it's -- I think HHI closes. I have a very high degree of certainty around that. But to your point, if it didn't close, look, it's a great business, it generates a lot of free cash. They would have to pay us a $350 million termination fee. That's almost a turn of leverage on the RemainCo. And I believe we will be able to navigate our leverage through earnings uplift and debt paydown to about 3.5 times to exit the year.

That's incredibly helpful. If you'll entertain me, there's a lot of confidence in the deal closing. Certainly, this organization is not -- is no stranger to closing deals and spaces with highly consolidated market share. Can you just maybe give some sense of where in the regulatory review, set regulators maybe looking? Is it market shares at retail? Is it market shares of specific channels like commercial [Indiscernible] is it technology, mechanical verse electro -mechanical on the lock sets? That's just what is your sense of why the deal besides the fact that a lot of deals go through second review, might be seeing another regulatory look. And then if I could just connect to that then I'll stop. Is the leakage on the deal from the gross to net is pretty big, given the NOLs that you have? Can you maybe just expand on that if you have any additional perspective on why that gap is so big? Thanks so much.

So first, I'm really happy to entertain you on anything, but to answer all your questions around regulatory, I will not indulge you. In terms of the GAAP, I'll pass that to Jeremy. I would just tell you, look, we are working diligently with ASSA. We're working very well with the regulators and we have a high confidence that this deal closes. ASSA is an amazing partner. This is not a financial trade for them. This is a strategic move on their part. It fills in a lot of gaps for them and we're going to get this done with our partners at ASSA ABLOY, Jeremy you want to take the gross to net.

Sure. Yeah. I just add, this timeline is normal course in my eyes from a deal of this size. And so, there's really not been any surprises on our front. On the gross to net, you just have to remind everybody that we paid $1.4 billion for the business 10 years ago. So just on that purchase price, you've got a $3 billion gain you've got to deal with. So, if you did that math pretty quickly, you can get to the leakage when you add in overall fees. So that's the challenge there, Chris. But fortunately, we do have those NOLs to shield some of that huge increase in value that we have achieved over the last decade.

Well, thanks for all that. And I thought I'd try anyways. So, I'll get back then. Thanks.

Hey, happy Friday. Good try, good try.

Thanks, Chris.

Thank you. Up next, we have Steve Powers of Deutche Bank. Your line is open.

Hey and good morning. Thanks. Hey, Jeremy. Apologies if I missed this but can you just confirm that the reiterated guidance for fiscal '22 remains solely focused on the RemainCo business as it exists today and doesn't contemplate contribution from Tristar?

Yeah. That's right, Steve. We -- there's still a little bit of uncertainty in the timing of closing Tristar. I believe we said within the next 90 days or so, so it wouldn't be appropriate to put anything in there. But as time progresses and we have certainty of closing date, we'll add more as the year goes on.

Perfect. But -- so then in terms of all the steps you're taking to allow you to maintain that current guidance on the RemainCo despite the inflation, the supply chain pressure, you talked through pricing a bit earlier. But I guess I'm curious just for a better sense of the balance between incremental pricing over the remainder of the year versus incremental productivity, because it seems like given the timeline and getting price to market, you have to be leaning on both levers. And I think you spoke to that a little bit in the prepared remarks, so just you need a balance there and to the extent that there is material productivity to also build in the back half is that -- can we think about that as a structural productivity that we can extrapolate the 23 and beyond, or is that just fiscal 22 belt tightening to get next, through the year and then we reset the base next year?

Randy will take that one. Thank you.

Good question, Steve, and I would tell you that most of the adjustment is coming through pricing actions. And team has been working on that nonstop for a long time so it is the material portion of it. With regards to the additional productivity, again, maybe half-and-half there. So, some structural productivity related to continuing down the work streams that we developed through our Galileo initiatives. But also doing some stuff that's temporary, it's appropriate in response to given where we are on the supply chain of product availability, etc.

Okay. That's helpful. And Randy, maybe while I have you talking, just as you think through what you're putting in place to improve supply chain status, improve service levels, any sense for how you stack up on those fronts relative to competition and whether you see the initiatives that you're putting in place to improve product availability, does that -- is that just going to help you stay neck-neck with competition or do you think you got some advantages to the extent that this could be an opportunity to actually gain some share, gain some distribution if you can outpace competition.

Yes, great question. We're working with a number of external experts and advisors to help us keep a track on that. And so, as we operate various businesses in various regions around the world, I would tell you that we find ourselves -- I believe we find ourselves in pretty good position relative to the averages in most situations, but there are some variations up and down. But the -- as the supply tightens the economics of global supplier becoming more efficient. And so, there's less opportunity to leverage for outliers within the current market. I think the real move here is on what you're going to be doing to your manufacturing supply chain base to address resiliency and flexibility going forward. Because the certainty that exists today is that this isn't the last disruption, we're going to see in the next five years. There will be something else that happens. And the question is, how are we setting up our networks to be able to respond and handle that as of yet next unforeseen challenge. I don't think it's something that I would say we feel is a huge advantage for us but definitely doesn't feel to be a negative versus our competition.

Okay. Very good. Thanks to you all. Appreciate it.

Thanks, Steve. And Chris, I think we have time for one more question before we hit the top of the hour.

Thank you. Next, we have Ian Zaffino of Oppenheimer, your line is open.

Hi, great. Guys, thank you. Good stuff today. I wanted to ask you David, maybe longer-term and I know you obviously have a lot of stuff going on right now with HHI and now [Indiscernible]. But if we kind of think past that, how do you think about the portfolio going forward? Are we going to be a two vertical company that continues to get larger and larger in each vertical? Do you think it'll maybe even go back to a third vertical? How are you thinking about that? And any other type of color you could give us as far as the longer-term strategy? Thanks.

Yeah, man look, I got to get there first. So, a lot of lifting to do here the next nine months or so. But look, we love the Pet space. We believe that we've got a phenomenal portfolio brand. We believe we have a very good team that knows how to bring fast innovation to space. We believe we are building the portfolio more and more to consumables. And as an investor, I happen to really like 5%, 10% type growth categories that we believe we can outpace. And then I really like consistency of recurring cash flows, and I believe these assets in today's market are 15 times EBITDA assets. And it's my job to create shareholder wealth. That's why I come into work every day. So, Home & Garden is very similar, 20% plus EBITDA margin business. We just became the number one pest-control brand at retail with Spectracide. We've invested very heavily in R&D. We've built out a very, very good team that has a lot of innovation still on the pipeline going to get 3PAO. But we think we're going to bring a lot of innovation in 2023. And so, if you can envision where we're trying to take the company, you're going to end up with a basically debt-free pet home and garden business with phenomenal growth rate, with really good margin structure, excellent free cash flow conversion, in industries that are very fragmented. And when you can do tokens where you are buying down multiples because your synergies both on the cost and revenue side are terrific, you can create a lot of shareholder equity value. And so that's where we're steering the boat. Similarly, I don't mean to drive the call out, but Tristar is really game changer to appliances. Being able to create content, and despite the consumer through DRTV and from Marshalls. And take that ad spend and show it to brick and mortar retailers and Omnichannel retail partners, really drives categories, news and excitement. It's been something I've been trying to accomplish in 3 years have been trying to get marketing average and we've done a lot. We've done good. But I think this is a game changer for our HPC business and it just happens to give me enough critical mass and profitability where I believe I can IPO it. Maybe don't go that route. Maybe we spend it, maybe we do another merger with a public company. But if you think about how that typically happens, most IPOs you float 20% of a company, we would be able to build that independently. Have a lot of equity at Spectrum. Take our time to take dividends out, sell it down over time. You can create a phenomenal amount of shareholder wealth doing that. And so that's where we're going. That's the vision of trying to get everyone to focus and look at. And I genuinely believe when we land these things, our stock price will be materially higher. And again, that's what I'm excited about. But yes, look, I want to build a very large Pet and Home & Garden business. I have zero intention after these actions are done to go do some third vertical. We've spent three, four years cleaning up the portfolio, about to get our debt down and be a really, really healthy company. And I think we should stick to our knitting, do what we know how to do, and create a lot of wealth for our partners. And that's how I'd end the call. Thanks for the question.

Yeah, thank you for the answer. Have a great day.

Thanks, Ian. Thanks everybody for joining us. We really appreciate it and thanks Chris for hosting us. I know we still have a few people in the queue. Apologies, we didn't get to you before we had to end the call, but please reach out to me directly or Julian, or Faisal and we're happy to get something on the schedule with you. Thanks. Happy Friday. Hope you all have a are great weekend.

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day and enjoy your weekend.