Spectrum Brands Holdings, Inc. (SPB) Earnings Call Transcript

Hey, good afternoon. Thank you for joining us. I'm David Maura, the Chairman and CEO, and I have the privilege of leading this amazing company called Spectrum Brands. I'll provide an overview, including our company's strategy, and then Randy Lewis, our Chief Operating Officer, plans to detail our financial performance and dive into our global productivity improvement program. We're excited to share with you today our Spectrum Brand story. First, please take a minute to review the next couple of slides that outlines our forward-looking statements and reconciliation of certain non-GAAP financial measures that we may discuss today. Before we dive in, I really want to acknowledge our employees around the world. Our progress as a company, especially over the last few years, is only possible because of our 12,000 global employees, who have embraced both our global productivity improvement program and the spirit of our servant leadership culture. This team that I'm so proud of has persevered through a global pandemic to deliver excellent financial performance for our long-term stakeholders. This progress and momentum started by delivering on our 2019 commitments and then growing both the top and bottom lines in 2020. Fiscal 2021 is off to an exceptional start. With double-digit sales growth across all business units and EBITDA doubling. You will hear more on this from Randy, but Spectrum Brands is emerging now as a more efficient, focused productive and consistent operating company. We are a company on the move again. Let's start with a quick snapshot of our businesses. Spectrum Brands grew both top and bottom lines last year, generating $4 billion of sales and $580 million in adjusted EBITDA. We are now embracing our new identity as a true home essentials company. The left side of this slide demonstrates our scale and mix across 4 diverse business units. If we could start with Hardware & Home Improvement, or HHI, as our biggest asset with attractive margins in the high teens. HHI represents the #1 market share position in locks and hardware. Kwikset is the #1 mid-price point lock in America today. Global Pet Care has been our most consistent performer with 9 consecutive quarters of top line growth and 7 consecutive quarters of bottom line growth. Our pet care team continues to build its worldwide market leadership position in the core categories of Aquatics, Dog Chews, Pet Grooming and Pet Stain & Odor. Home & Garden, while our smaller business is also our most profitable business with a significant moat around it called the EPA. We do have an amazing product lineup as we continue to tell our story around brands like Spectracide, Cutter, Hot Shot and EcoLogic. Home & Personal Care is our most global business, generating 6 consecutive quarters of sales growth. This unit houses the world-renowned brands of George Foreman, Remington, Russell Hobbs and Black & Decker. We also believe that our geographic concentration is a competitive advantage. With 3/4 of our 2020 sales generated from North America last year and 17% of sales from Europe. Our brands are critical to understanding Spectrum Brands. We believe we are better positioned today than we have ever been to drive demand as a home essentials company with consumers needing and desiring our brands and products more than ever. Investing in consumer insights, innovation and marketing is propelling our brands and products to new heights. These reinvestments are targeted at our top 15 brands, which represented 81% of revenue last year and are driving stronger organic growth for our company. We will continue to focus on executing our new operating model, leveraging our strong manufacturing and distribution footprint. As you recall, it was only 2 short years ago that we laid out our Spectrum 2020 vision to launch transformational change of our company following the divestiture of 2 of our businesses. During that time, we've provided the organization with vision, clarity and focus. We worked to simplify our operations, drive down costs and reinvest in innovation, building our brands through our Global Productivity Improvement Program. Importantly, we led cultural change within the company. We encouraged our teams to work collaboratively across the enterprise and our servant leadership approach focused on empowering people to drive that change. Now after the great strides in the last couple of years, evidenced again by our sensational first quarter financial results, we have evolved the Spectrum 20/20 framework. In 2020, as the COVID pandemic came on, we became a home essentials company, providing consumers with brands and products for their homes, whether it's in the kitchen, the yard, around the house or with their pets. As we start 2021, we are taking the opportunity to refresh our mission and refine our strategic framework. Spectrum Brands is a home essentials company, focused on delivering products and solutions in and around the home. Simply put, our mission is to make living better at home. We use consumer insights to fuel innovation, which drives our new product development. Our long-trusted brands provide the newest solutions to improve the way people live life at home, ultimately, exciting consumers. Because we are structured for growth and efficiency, we can focus on consumers, customers and stakeholders around the world every year. We are led by our values of trust, accountability and collaboration to serve others through this common mission, we make living better at home. I'm excited about this story and believe it represents an inspiring, purposeful and clear vision of who we are and the value we provide to consumers, customers and employees. To support this new story, we've updated our Spectrum Brands logo with the tag line, "we make living better at home," which reflects our mission and purpose. We've been talking about the strategy throughout our global productivity improvement program over the last 2 years. Working across businesses and investing in technology, we want to quickly discover and convert insights about consumers. What do they want? What do they need? What are they buying today? And what do market trends tell us about what they will want to buy tomorrow? We now have a consumer insight and analytics team in our commercial operations function that is helping us collect and analyze our own data as well as customer and industry data to make better decisions regarding our portfolio and our go-to-market strategy. Then with that insight, we'll continue to fund innovation. We are developing new products and solutions for the home. Recent examples of innovative products include our Kwikset locks with Microban technology, which fights bacteria growth on the hardware. Or our Halo Touch Smart Lock, which uses your unique fingerprint to lock and unlock your door. Just this past year, during COVID-19, we expanded our portfolio in Nature's Miracle with disinfectant products. And in Cutter, hand sanitizer to launch additional cleaning tools for homeowners through trusted brands already in their homes. This type of innovation is what we want to continue to drive to delight consumers and build brand equity. Innovation is as critical to growing our trusted brands as is investing in advertising and promotion to tell our exciting innovation stories and to drive growth. Over the last 2 years, we have ramped up our investment in marketing and digital advertising. For example, we stepped up our A&P investments in 2020 by over 45% to $50 million. And given the strong returns and improved POS, we expect to invest about $70 million in fiscal 2021. Our Comm Ops and marketing teams built a strong and cohesive omnichannel strategy, which is reaching our target consumers and investing in new content to speak to their markets. Our supply chain teams are working to make our products more accessible and affordable around the world by identifying cost savings and manufacturing and distribution improvements to improve our resiliency. Additionally, we expanded our portfolio of brands with bolt-on acquisitions like Omega Sea and Armitage over the last year. Ultimately, our goal is to excite consumers. We are very purposeful here in using the word consumers. We partner with our retail customers to focus even further on our consumers and their needs going forward. We will provide new and exciting innovation that meets the consumers' needs and desires and that solves problems in and around the home. We will relentlessly continue to do so in the future. Most importantly, we talk about the values that drive how we do things. This is part of our business that I'm most passionate about as I introduce the philosophy of servant leadership. In essence, servant leadership calls on leaders and employees to work and service, service to our customers, service to our consumers and service to each other. We've added these 3 cultural values that speak to that overall philosophy of service, and they are: Trust, we build trust through our integrity, we are honest, respectful and more inclusive. Accountability, we value our work, and so we hold ourselves and each other accountable. Collaboration, we contribute our unique individual expertise and experience to achieve our unified goals. I believe we have already started to live these values today. Our culture is critical to drive and achieve success at Spectrum Brands. It's what I most wanted to see change at the company when I was appointed CEO about 3 years ago, and I'm thrilled with the progress we've made so far. We believe we can achieve our strategy with our competitive advantage, which is our new operating model. This is a change we started with our global productivity improvement program that we've been driving the past 2 years, and the model is in place today. To drive growth, we are harnessing all our experience and expertise across the company to be better, faster, stronger together. Our 4 business units are focused on meeting the needs of their product categories. They're building their brands, developing new products and meeting the needs of consumers with their partner customers. We have 6 global enabling functions, and that's a new term, who work to enable the growth of our 4 businesses. They provide strategy and processes at a global scale. This operating structure will enable us to efficiently partner with the businesses to drive our strategy of insights, innovation, trusted brands and consumer excitement, which will contribute to sustainable growth over time. You'll note, we have the word grow in that circle with our 4 business units. This is because the model will allow us to improve our portfolio in the future through disciplined M&A with strategic tuck-in acquisitions that are synergistic and help drive value creation. Now you'll hear more from Randy on our financial and operational performance. Over to you, Randy.

Thanks, David. Hello, everyone. My name is Randy Lewis, and I serve as the company's Chief Operating Officer. While I really wish we were able to talk today in person, I'm still very excited to connect today via video to update you on the significant progress that we've made against many of our strategic initiatives at SPB. Overall, our recent financial performance, including fiscal 2020, reflects major benefits from our operating model transformation as well as the addition of significant new talent in key strategic roles. Our 2020 performance included growing sales by over 4% to $4 billion and adjusted EBITDA growing by over 2% to $580 million. Now let's dive into the specifics of each business unit. Starting with HHI, our Hardware & Home Improvement business represents a unique collection of home improvement segments with market-leading brands, significant market penetration and multichannel distribution. The macro housing environment remains very positive across both new housing starts and the remodeling market. Security products make up about 2/3 of HHI sales, where we hold the #1 position in U.S. residential locks with the Kwikset brand, the #1 residential lock in Canada with the Weiser brand, and the #1 luxury lockset with the Baldwin brand. The strength of this segment is based on our broad product offerings at each major price point from OPP to high end. Our strong product innovation pipeline and vertically integrated supply chain support the foundation of our patented SmartKey technology. This technology allows a consumer or a property manager to rekey their own locks to any Kwikset key in about 15 seconds. And this has led to a very large installed base with approximately 2/3 penetration in new residential construction and a growing share in the area of home automation. HPC, our Home & Personal Care, grew 2020 sales by nearly 4% and adjusted EBITDA by nearly 6%. This unit is our most global with the U.S. representing about 40% of the revenue. And we drive globally recognized and market-leading brands like Remington, Black & Decker, George Foreman and Russell Hobbs across both the small home appliance and Personal Care segments. Our George Foreman brand is the clear market leader in the indoor grilling segment worldwide. The Black & Decker brand has been the U.S. market leader in the fast-growing toaster oven space, including integrated air fryer technology. In the U.K., Russell Hobbs is the market leader in kitchen and home appliances and continues to expand share. And with Remington, we are really innovating in the hair care space globally, while leveraging our partnership with the Manchester United Football Club. The foundational competency of this business unit is its new product development capability, where a large team of globally integrated engineers have proven skills in developing and launching high-quality products at affordable prices with unique innovations. Our Global Pet Care business is the leading global supplier of pet care products, trusted to enhance the lives of pets of all kinds as well as those who care for them. GPC comprises a range of premium brands that hold the #1 market share position in their respective categories, including Dog Chews with the Good 'n' Fun, DreamBone and SmartBone brands, dog and cat grooming with the FURminator brand. Pet Stain & Odor with the Nature's Miracle brand and Aquatics with the Tetra, GloFish and Omega One brands. These well-recognized brands are available globally across all major channels, bolstered by efficient speed to market and innovative solutions, strategically geared to address the needs of pet parents. From Dog Chews to capitalize on human food trends, to one of a kind dog and cat de-shedding tools, vibrant species of fish and superior fish nutrition. GPC's focused on developing and leveraging unique IP has elevated its brands to necessities that pet owners depend on. As more and more people bring pets into their homes and increasingly treat those pets like members of the family, these brands should continue to enjoy sustained demand and growth for many years to come. Home & Garden is our highest margin business and generated 2020 sales growth of 8.6% and adjusted EBITDA growth of 6.2%. It's the largest provider of retail pest control products in the U.S. and has a growing presence in Latin America. With some of the fastest-growing brands in the category, including Spectracide, Cutter, Hot Shot and Ecologic, our business is #1 in several key areas, including outdoor insecticides, mosquito area repellants, indoor foggers and bed bug control. The outdoor herbicide and insecticide segment is H&G's largest. And the Spectracide brand is leading the way as we outpaced the category growth by a ratio of about 4:1 over the past 3 years. This year, Spectracide launches its new Flip & Go sprayer technology, delivering consumer preferred, 1 handed convenience in its new bug stop barrier spray. In the household insecticide segment, H&G is also outpacing the category, where Hot Shot gained share through ant, roach aerosols with its unbeatable formulation. Finally, in repellents, H&G grew 4x faster than all major competitors in 2020, driven by the Cutter brand and its new protect your people consumer engagement campaign. H&G's momentum has become possible through a distinctive combination of brands, EPA registrations, efficient manufacturing and strong retailer relationships. With a transformation mindset, H&G is leveraging insights in new ways to develop consumer-preferred products for millennial and Gen Z consumers. And to communicate to those consumers how we can help them conquer nature's challenges and enjoy life. Start of fiscal 2021 has seen improved supply chain performance and higher service levels in all 4 businesses. These factors helped drive double-digit sales growth in each business, and our productivity gains and operating leverage led to record growth in adjusted EBITDA. Now let's turn to Slide 14 to discuss our internal growth and efficiency efforts through our global productivity improvement program. This program was started almost 2 years ago to reimagine all aspects of our business to ensure that Spectrum Brands is bringing real value to the businesses within our portfolio. We created a new operating model that David discussed earlier. We're enabling functions to provide best-in-class service to allow business units to concentrate all of their efforts on knowing and delighting the consumers in their space. Along the way, our efforts to improve efficiency and effectiveness in many areas will deliver substantial operating savings. By the end of fiscal 2020, we had captured over $90 million of gross savings, and we remain on target to achieve at least $150 million in total savings by the end of this fiscal year. We also remain resolute on using those savings to reinvest back into the businesses to deliver long-term sustainable organic growth through enhanced innovation and consumer engagement. This program is our most important strategic initiative as we continue our transformation journey. Our GPIP program contains specific efforts to strategically invest in many key areas. We focus on efficiency and resilience in our supply chain by adding capabilities in planning, sourcing and distribution. We redesigned the front end of our business operating model to focus on consumer insights and using data to drive scale best-in-class approaches to e-commerce and content analytics. We are developing the capabilities across all 4 business units around data-driven white space analytics to ensure future growth opportunities are identified and prioritized. And we are focused on the technology enhancements and talent upgrades in all aspects of the enterprise resource planning process. In short, we are looking to ensure the long-term sustainable success of the business. While we have completed the majority of the structural and standup work within the GPIP project, and we've already realized much of the cost benefits, we are just now beginning to generate benefits from many of the growth enablers, and that's one of the reasons that we are so excited about the future. One of those major growth enablers of our transformation was the creation of our commercial operations team. Our Comm Ops organization is an SPB-wide center-led team of subject matter experts dedicated to improved development, governance and execution of our commercial strategies. We are leveraging new tools and consumer insights to ensure we maximize SPB consumer experience throughout their journey in our spaces. The team builds a single source of truth about the consumer for our overall portfolio and ensures growth through the value creation in each business unit. This team is an enabling function for all business units and acts as a governing body for alignment and collaboration for the greater business. Four pillars of subject matter experts across insights and analytics, digital marketing, e-commerce sales and operations and revenue optimization. They partner with the brands and product experts in each business unit to drive growth. This unique structure is centralized and brand dedicated resources operating seamlessly throughout the organization and can be easily scaled and redirected to meet the changing needs of the business. Our commercial execution and results have clearly improved as this model has begun to take root across the broader business. Now finally, operating at a high level, the Comm Ops team invigorates brands with what we call our flywheel of growth. Everything we do starts with understanding consumer and using data to develop deep insights about the markets we participate in. Then we engage at all levels of the consumer journey with compelling tailored content. From there, we drive for the moment of truth with the consumer, leveraging analytics and tools to optimize discoverability of our products and drive conversion. This gives us the opportunity to analyze these revenue streams for optimal ROI on our engagement and promotional activities while ideally maximizing price. This ultimately leads to new insights and consumer behaviors, which adds to the momentum of the flywheel all over again, a unique operating model dedicated to long-term sustainable growth. Now before I turn it back to David, I want to share our earnings framework and how our efforts are coming together to drive improved financial results based on our strong start to the year, continued discipline with our GPIP efforts, including our reinvestment back into the businesses, we are confident in our earnings framework for 2021, which reflects high single-digit net sales and adjusted EBITDA growth and adjusted free cash flow of $250 million to $270 million for the year. Now back to David for closing remarks.

Thanks for the deep dive, Randy. Let's conclude with the key highlights. I firmly believe that Spectrum Brands is back, and I'm extremely proud of our global teams and excited about our future together. Our performance over 2019, 2020 and our earnings framework for 2021 reflects the importance of consistent execution, investing back into the business to drive sustainable long-term growth with long-standing retailer relationships. Additionally, we've worked diligently to strengthen our balance sheet and remain resolute in our net debt-to-EBITDA target of 3x to 4x as well as maintaining ample liquidity. As Randy detailed, we remain focused on our GPIP efforts and keeping the flywheel of growth moving in the right direction for our long-term stakeholders. We thank you for your interest in Spectrum Brands.