Q4 2020 Spectrum Brands Holdings Inc Earnings Call
Q4, 2020 spectrum Brands Holdings, Inc Earnings Conference call.
All lines have been placed on mute after the speaker's presentation, there will be a question and answer session.
Ask a question during the session you may need to press star one on your telephone keypad.
I'd now like to turn the call over to your speaker today Mr., Kevin Kim. Thank you. Please go ahead Sir.
Right. Thank you Lisa welcome to spectrum brands Holdings, Q4, and full year 2020, <unk> earnings conference call and webcast I'm, Kevin Kim Divisional VP of Investor Relations and moderator for today's call to help people or comments, we have placed a slide presentation on the advent calendar page in the Investor Relations section of our website at www.
<unk> Dot spectrum brands Dot Com. This document will remain there following our call.
Starting with slide to the presentation, our call will be led by David Maura, Chairman and Chief Executive Officer, Jeremy Smeltser, Chief Financial Officer, and Brainy Lewis, our Chief operating officer.
After their opening remarks, we will conduct the coupon as lease outlined training.
Turning to slide three and four our comments today include forward looking statements, which are based upon managements 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 free.
Yes release dated November 13, 2020, and our most recent SEC filings and spectrum brands Holdings. Most recent annual report on form 10-K, and quarterly reports on form 10-Q.
No obligation to update any forward looking statements also please note we will discuss certain non-GAAP financial measures in this call reconciliation to non-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 now with that I mean called.
On the call over to David Moore.
Thank you Kevin and good morning, everybody. Thanks for joining us for today's call.
With the announcement of this quarters earnings I'm pleased to tell you that our efforts to reinvested and reignite growth across our business units are now driving real tangible impressive and most importantly sustainable results.
Since we began these efforts we have freed up investment dollars from our global productivity improvement program.
And we have thoughtfully investing in our people our research and development activities, our innovation capabilities and new marketing initiatives.
This is now reignited the Flywheels <unk>, new product development launches and restored our top line growth.
Expanding our margins and is now driving much greater profitability and free cash flow generation to our bottom line.
These achievements are allowing us to continue to reinvest for even further growth in the future on a sustainable basis as we move our company forward.
In short I am thrilled with the resilience of our people and our businesses and the financial results. We have delivered in fiscal 2020.
If I could call your attention to slide six.
I'd like to pause.
Recognize the accomplishments of the spectrum brands family, which are impressive on their own but are even more impressive considering the headwinds we encountered this year.
Our teams faced and overcame many challenges, including demand and supply interruptions from the COVID-19 pandemic.
Gross tariff headwinds of over $120 million.
We're about $70 million higher than the prior year.
And deliver on our global productivity improvement program, creating a better faster and stronger company.
Or 12000, plus employees around the world have really come together this year as a unified team to build an amazing future.
We have a lot of momentum now and we're making great strides in.
In particular, our teams from motivated by our new identity as a home essential skills.
We are approved and consumers with brands and products that bring security Joy and happiness worldwide.
Whether it's in the kitchen the yard around the house for with your pets, we are delighted to make life better and more enjoyable.
Our balance sheet also improved sequentially ending the year with net leverage of 3.4 times and we have over $1.1 billion and total liquidity.
Our accomplishments this year give us further confidence in our ability to deliver sustainable growth.
Moving to slide seven.
Our fourth quarter and full year financial results improved with net sales and EBITDA growth.
During the quarter, our net sales accelerated as we grew 17.9% was.
With strong growth across all business units.
These top line results reflect elevated demand levels strong Pos and improved output. This is evidence of our teams our company's quick recovery from the COVID-19 related supply disruptions, we encountered earlier in the year.
Additionally, or incremental marketing and advertising investments are paying dividends by driving stronger organic top line growth.
Operating income and EBITDA growth was driven by strong volumes and improved gross margins.
We achieved a $190 million and adjusted EBITDA This quarter and 500 sub $597 million for the year.
We reported a reduction of 17 million to those amounts to reflect that starting with this quarter. We have changed our annual incentive compensation program to be paid entirely in cash instead of a mix of equity and cash as we've done in prior years. This change will have a corresponding reduction.
And our annual equity compensation expense, resulting in a net neutral impact on our annual compensation expense.
Turning to slide eight.
For the fiscal year, our net sales grew 4.3% and reported EBITDA grew 2.3%.
And we grew 5.3% on a comparable basis when adjusting for the change to our incentive compensation program.
And we generated free cash flow of 254 million exceeding the midpoint of our initial fiscal 2020 guidance.
On slide nine.
As I've said before we have embraced our position as a home essentials company.
Instead of pulling back in the face of the COVID-19 challenges, we're continuing to lean forward and improve our operating model add talent strength in our brands through marketing and advertising and drive innovative product introductions.
The plans, we outlined on our third quarter call to invest an incremental $20 million in advertising and promotion remains on track.
We started in the second half from 2020, and we're continuing into the first half from 2021.
We firmly believe these incremental dollars have and will continue to produce results that create consumer excitement and awareness for our trusted brand portfolio.
While still in the early days the initial results are very encouraging.
As each of our brand campaigns experienced a clear Pos lift in.
Security sales for HHR are focused on microbiology, and Smirky technology with quickset drove tens of millions of impressions.
This collaborative work from our call offs and HR teams further solidified our market leading position in the U.S. residential security category with differentiated products.
This also drove financial results in the second half with a significant lift in Pos and a measured increase in our click through rates.
Next we turn to slide 10.
I'm also excited to provide you today, an update on our global productivity improvement program.
Earlier this morning, we announced an increase to our total gross savings target to $150 million over the life of the program.
Additionally, in fiscal 2021, we expect more savings from this program to drop to our bottom line with less incremental tariff headwinds on a year over year basis.
We believe we are better positioned today than we've ever been to drive demand as a home essentials company with consumers needing our brands and products more than ever.
Additionally, with the supply chain disruptions from COVID-19 earlier in 2020, largely behind US we are confident in our ability to deliver sustainable organic growth in 2021.
We have tailwinds from continued momentum in consumer demand.
We have a strong backlog of orders in HGI try.
The early benefits the benefit of early customer orders in our home and Garden Division.
Continued strong demand for consumables from new pet parents in our global Pet care business and we have a strong holiday lineup for home and personal care unit.
Earlier today, we provided preliminary outlook of 3% to 5% net sales growth and mid single digit adjusted EBITDA growth from fiscal 2021.
Due to difficult comparisons from the second half from fiscal 20, we expect our fiscal 2021 growth to be first half weighted.
Jeremy plans to provider incremental details to help you with your model and the phasing of our year in his prepared remarks.
If we can turn now to slide 11.
Going forward, our capital allocation priorities continue to focus on one allocating.
Allocating capital internally to our highest return opportunities. This includes strengthening our brands through research and development innovation, new products and advertising and marketing to drive vitality and profitable sustainable organic growth.
Two we plan to return cash to shareholders via dividends and opportunistic share repurchases.
And finally number three a disciplined M&A strategy with tuck in strategic acquisitions that are both synergistic and help drive shareholder value creation.
As announced in late October we're very excited to add arbitrage, a UK based market leader in dog and cat shoes in trees to our highly successful and fast growing global pet care business unit.
Over the last few years arbitrage has grown sales at a 17% compound annual rate and we expect revenue synergies with our global scale and resources to expand that growth across continental Europe and beyond we will also strengthen its E commerce business I want to extend a bit.
Welcome to the arbitrage team to the spectrum brands family and I'm confident in our ability to create tremendous volume together.
During the fourth quarter, we reduced our company's leverage ratio from 3.9 times adjusted EBITDA to 3.4 times on a net net basis going forward. We plan to continue to de leverage our balance sheet and maintain a high level of liquidity.
We are updating our near to medium term target for net leverage ratio to three to four times area.
Before ending my comments I want to take a moment to acknowledge the passing of Kenny Hambrecht.
And Phil shoe.
Ken served our company as an outstanding director of our board he passed away unexpectedly on September 25th.
Ken was not only a 10 year member of our board of directors.
It is also a personal friend.
And a true Gentleman's gentlemen.
Ken was a steady hand, and a voice of encouragement to me and the rest of the management team.
During his tenure with the company.
The board and I will Miss can his guidance to us going forward.
Phil was the president of our HIV business and he passed away unexpectedly on September 19th.
Bill was a valued member of spectrum brands and our leadership team for the last 12 years, we will all Miss Bill.
FICO for our time with our friends.
And we will continue to honor him as we push forward with his love of HHR. His passion for innovation caring for people and as love to win.
Now you'll hear more from Jeremy on the financials and Randy will provide you with additional insights as we update and give you updates on the different business units I'll now turn the call over to Jeremy.
Thanks, David Good morning, everyone.
If we could turn to slide 13, I will start with a review of Q4 results from continuing operations beginning with net sales.
Net sales increased 17.9%, excluding the impact of $4.2 million and favorable foreign exchange and acquisitions sales of $3.8 million organic net sales increased 17.1% with growth across all four business units.
Gross profit increased $88 million and gross margins of 36.1% increased 240 basis points, driven by improved productivity from GE Pip favorable pricing and mix.
SGN a expense of $269.3 million increased 15.9% at 23% of net sales with the dollar increase driven by improved volumes and higher marketing investments.
Operating income growth of 245% was driven by improved volumes and profit margins and lower restructuring spending as well as no impairment charges in the current year period.
Net income and diluted earnings per share were driven by the operating income growth and lower shares outstanding.
Adjusted diluted EPS increased 52.2% due to favorable volumes improved productivity and positive product mix.
Adjusted EBITDA increased 6.3%, primarily driven by volume growth as well as productivity improvements and positive pricing.
Adjusted EBITDA also increased despite a change to our incentive compensation program, which resulted in a reduction of stock based compensation expense and consolidated adjusted EBITDA of $17 million for the full year fiscal 2020 in Q4 2020.
On a comparable basis adjusted EBITDA grew 16.7% by.
By business unit, the adjusted EBITDA growth was driven by HHR global pet care at home and Garden.
Turning now to slide 14.
Q4 interest expense from continuing operations of $38 million increased 1 million over last year's quarter.
Cash taxes during the quarter of $7.4 million were $2.6 million lower than last year.
Depreciation and amortization from continuing operations of $35.5 million was 6.9 million lower than the prior year.
Separately share and incentive based compensation decreased from $14.9 million last year to zero point Threemillion driven by a change to incentive compensation payout methodology, which resulted in a reduction in stock based comp expense and consolidated adjusted EBITDA of $17 million from both the quarter and the year.
Cash payments for transactions were $6.2 million down from $6.7 million last year.
And restructuring and related payments for Q4 were $10.2 million versus $9.5 million last year.
Moving now to the balance sheet. The company had a cash balance of $531.6 million and approximately $579 million available on its $600 million cash flow revolver at year end.
The company had approximately two and a half a billion dollars of debt outstanding consisting of approximately $2.3 billion of senior unsecured notes and approximately $164 million of finance leases and other obligations.
Additionally, net leverage was approximately 3.4 times at the end of fiscal 2020.
Compared to our previously disclosed expectations to end the year at the midpoint of our previously communicated net leverage target range of three and a half to four times.
Further we sold approximately one and a half million shares of Energizer stock for proceeds of $67.4 million during the quarter and held just under 1.7 million shares at year end.
Capital expenditures were $16.5 million in the quarter versus $18.1 million last year.
Turning now to slide 15, and our ex expectations for 2021.
We currently expect 3% to 5% reported net sales growth in 2021 with foreign exchange expected to have a slightly positive impact based upon current rates.
We currently expect this growth to be first half weighted.
Adjusted EBITDA is expected to grow mid single digits.
This includes benefits from our global productivity improvement program approximately 11 months of results from the recent Hermitage transaction, which last year generated about $80 million in revenue.
And incremental net tariff headwinds of about $25 million driven by the expiration of previously disclosed retrospective tariff exclusions in 2020.
From a phasing perspective, we expect Q1 to be positively impacted by replenishment of retail inventory levels in all four businesses and plans to fulfill retailer request for early delivery of products for home and garden.
Fiscal 2021, adjusted free cash flow from continuing operations is expected to be between 250 and $270 million versus $254 million in fiscal 2020.
This includes as a strategic investment in inventory levels of about $30 million.
Depreciation and amortization is expected to be between $165 million and $175 million, including stock based compensation of approximately $30 million to $35 million.
Full year interest expense is expected to be between 140 and $145 million, including approximately $6 million of non cash items.
Restructuring and transaction related cash spending is expected to be between 55 and $60 million.
Capital expenditures are expected to be between 85 and $95 million.
Cash taxes are expected to be between 35 and $40 million and we do not anticipate being a significant us federal cash taxpayer during fiscal 21, as we continue to use net operating loss carry forwards.
We ended fiscal 2000.
Fiscal 20, with approximately $800 million of usable federal into wells.
For adjusted EPS, we use a tax rate of 25% including state taxes.
Regarding our capital allocation strategy as David mentioned, we have updated our target net leverage range to three times to four times from three and a half times to four times adjusted EBITDA and we ended the year with net leverage of 3.4 times.
As mentioned on our Q3 call and from David earlier, We're also planning for incremental advertising investments in 2021.
Additionally year over year comparability will be impacted in Q1, and Q4 of 2021 due to our fiscal calendar. This results in six additional days in Q1 of 2021, and Conversely, six less days in Q4 of 2021.
And lastly demand in October remained strong with net sales up across all business units now.
Now I will turn it over to Randy for a more detailed look at our operations.
Thanks, Jeremy and thank you all for joining us today I'm very excited to provide the comments today that will focus on a review of each business unit to provide detail on the underlying performance drivers.
Putting our operating results and I will also give you an update on the progress of our global productivity improvement program first.
First I want to note that we continue to prioritize the safety of our employees in light of the pandemic. The tireless work from our COVID-19 response team.
Has ensured solid implementation and adoption of strict safety protocols to protect our people and minimize the risk of Coca 19 spread within our facilities I'll also abiding by all government mandates turn.
Turning to the business results.
The operating environment improved significantly across each of our business units, especially HHR weeks.
We experienced net sales growth across all four business units as well as improved output levels until rates.
As David mentioned earlier, we are recovering quickly from earlier supply challenges.
Let's dive in each business unit net our expectations moving forward.
Starting with hardware and home improvement on slide 17.
Fourth quarter reported a net sales increase.
18.9% organic net sales increase of 18.7% strong Pos and improve supply drove strong net sales growth across security plumbing and builders' hardware categories. Adjusted EBITDA increased 29%, primarily driven by positive volumes as well as productivity improvements favorable.
Mix in pricing, partially offset by higher tariff and COVID-19 related costs.
Recall that last quarter, we outlined our expectations of a significant improvement in shipments given our order position and improving factory output as we progress through Q4.
That is exactly what happened as H. I recovered quickly from the supply disruptions caused by government shutdowns and reduce capacity mandates earlier in the year from.
Two of our plants in Mexico, and one in the Philippines.
During the quarter, our supply chain teams were able to raise productivity levels significantly above free cobot rates, which resulted in a record sales quarter for HHS.
Looking ahead into fiscal 2021, we expect another strong quarter of net sales growth in Q1.
Despite a really solid recovery in production and shipments in Q4.
Retail inventories remain below normal levels and our backlog of orders actually grew from 40 million to over $50 million by the end of the fourth quarter.
As we continue to see strong consumer demand.
Our teams expect to materially reduced the backlog by the end of the first quarter of fiscal 2021 supported by those continued elevated levels of production.
Aside from open orders, we also expect demand in 2021 to benefit from our new product introductions and incremental advertising investments.
This includes the benefit from incremental plumbing and security orders from Clayton homes, a top builder of manufactured modular and site built homes in the United States. We also expect to benefit from the rollout of Halo touch our retail partners are very excited about this innovative biometric and Wi Fi enabled smart lock with voice assist capability through Alexa.
And Google Assistant.
Additionally, our incremental advertising dollars for our quickset and sister brands are driving encouraging results with continued focus on micro bond, which incorporates anti microbial technology into the coding.
And smart key technology, which allows users to reach either own locks to any quickset key and about 15 seconds.
Now to home and personal care, which is slide 18.
Reported and organic net sales increased 5.8%, 5.6%, respectively, adjusted EBITDA decreased 22.8% to $22.7 million.
Net sales were driven by growth in both small appliances and personal care.
EBITDA was lower due to much higher marketing investments as well as higher tariff and legal expenses. This was partially offset by improved productivity and higher volumes.
This quarter represented the fifth consecutive quarter of year over year top line growth, including growth in the us, which was driven by convenience cooking and food prep.
Our team sees growth opportunities in the second half across cooking food prep breakfast preparation as well as shave and growth. This included incremental advertising investment focused on promoting George Foreman smokeless grill, which expanded beyond the initial retail partner in Q4 drove share gains to strengthen our number one position globe.
Really.
This product enables convenient and healthier meal preparation without the mess and smoothed from stovetop cooking.
While our inventory levels have improved sequentially continued demand again outpaced supply we are still not back to normal levels, but we are optimistic as we entered the critical holiday season with a much improved fill rate that we are making measured investments across key categories.
Demand remains strong for convenience cooking, leading the way personal care will continue to benefit from momentum of Remington innovations such as twisting kearl as well as new launches such as the hydraulic series overseas and went to straight in the Americas.
Despite the challenges of COVID-19, our Remington partnership with the Manchester United Football Club is still flourishing with.
With over 2000 local market Activations to date and 45% awareness among friends in a Q1 product launch in China.
Our focus in 2021 in home and personal care will remain on consumer led insights driven product introductions and continuing to incrementally investing in our brands and hero ranges across more markets than ever before.
Moving to global Pet care, which is slide 19. This quarter represented a record fourth quarter for revenue and profit with reported net and organic sales growth of 21.6% and 18.5% respectively.
And adjusted EBITDA grew 20%.
Top line growth was driven by both aquatic and companion animal categories higher EBITDA was driven by volume growth productivity improvements in pricing, partially offset by higher volume driven tariff costs and additional marketing investments.
Q4 represented the eighth consecutive quarter of year over year top line growth and six consecutive quarter of bottom line growth.
Our pet care team continues to build its worldwide market leadership position in the core categories of aquatic Doug.
Don't choose pet grooming pet stain in order and we recently further solidified our leadership position in the dog Chews category in late October with the acquisition of arbitrage pet care.
This transaction creates an excellent platform for continued international expansion of our choose business as Armitage is well established in the UK grocery channel and offers an attractive assortment of not only dog, but also cat choose treats and toys.
We expect 2021 and beyond to benefit from the continued execution of our global growth strategies, coupled with the strong category growth fundamentals.
Particularly the sustained demand of consumables given all of the new pet parents in companion animal and all the new hobbyists, who have recently entered the aquatic who reptile categories. These are long term commitments in bode very well for the future demand of our products.
And finally home and garden, which is slide 24th quarter reported net sales increased 37.8% and adjusted EBITDA increased 60.7% topline growth across controls household insecticides and repellents benefited from strong point of sale and replenishment as retailers supported an extended selling.
Season.
Results this quarter reflect a strong recovery from supply chain disruptions earlier in the year.
The EBITDA increase was driven by higher volumes pricing and productivity improvements, despite significantly higher marketing investments and higher manufacturing and distribution costs.
We plan to continue to invest more advertising dollars to tell our story around spectrum side cutter Hot shot and Equallogic, along with more research dollars to deliver even more innovative products.
We believe these actions will further enhance our vision to be the recognized leader in providing consumers the best solution to conquer natures challenges and enjoy life.
This is only possible with a continued focus of our distinctive combination of brands and formulations and registration supported by efficient manufacturing and strong customer relationships.
The fundamentals in this business remains strong and with solid profitability and high barriers to entry. We are confident that our strong brand equities increased investments in product development and marketing will accelerate long term growth rates. In addition to jeremys comments about retailers requesting earlier delivery of product in Q1.
We plan to exit a TSC manufacturing agreement with Energizer in February this will negatively impact sales in the second half of the year by approximately $14 million.
The decision to exit this low margin business will open up available capacity in our facilities for supporting our innovation driven branded products.
Now, let's turn to our internal growth and efficiency efforts and slide 21.
Non tour externals shareholders as our global productivity improvement program.
As outlined in our earnings release, we've raised our gross savings target to $150 million of savings by the end of fiscal 2021.
To date, our teams have already captured approximately $90 million of gross savings since the program inception and.
And this has helped cover for tariff expenses and allowed for reinvestment back into the businesses.
This includes our drive to grow our brands and products through new capabilities and increased investments, while we harness the collective knowledge expertise and resources.
In the key areas shown on this page.
This program continues to be our most important strategic initiative to transform into the new spectrum brands and our teams have laid a great foundation over the past year for partnership and collaboration.
Our results in 2020 reinforce that this is the right strategy. The spectrum brands is headed in the right direction to deliver long term sustainable organic growth as we focus on quicker more globally line strategies and decision making.
While we will continue to increase our investments into growth initiatives in consumer insights R&D and marketing across each of the businesses. We do believe a greater portion of the GP savings will flow to the bottom line as incremental tariff headwinds, which were substantial in both 2019 and 2020 are expected to be lower.
In 2021.
Additionally, our digital teams continued to leverage new data to identify consumer trends for new products and sales opportunities and create promotional content that appeals to the us those consumers across all four businesses. This quarter E. Commerce grew by more than 36% and represented more than 12% of total net sales.
To end my section I want to acknowledge another outstanding quarter of progress on our operating culture, and our strategic initiatives and to thank our 12000 plus employees for all they are doing to make us a better faster and stronger spectrum brands now back to David.
Thank you Randy Thanks, Jeremy and everyone for joining us today.
Given that we've covered quite a lot on todays call, let's conclude with a couple of takeaways. Please if I could have you turn to slide 23 from.
First our fourth quarter financial results reflected a strong acceleration in sales with exceptional growth across all business units second.
Second momentum in the business remains positive with continued strong demand in October our fiscal 2021 is off to a great start.
Third actions from our structural family through improved that business is nothing short of remarkable we.
We have embraced our position as a home essentials company instead of pulling back in the face of the COVID-19 challenges, we're continuing to lead in lean in to improve our operating model to add talent to strengthen our brands through marketing advertising and drive innovative product introductions. Furthermore.
Furthermore, we raised our gross savings target to $150 million over the life of our global productivity improvement program as we continue to improve our commercial and operating capabilities as a quicker more globally line company.
We believe we are well positioned financially and operationally to continue to grow and we will continue to be laser focused on our employees are consumers retail partners and our shareholders over the long term I want to thank you for your time and your continued support.
Before we turn to the questions I again want to address our employees.
I encourage you to keep finding ways to be part of our continuous improvement journey.
Keep listening to each other keep working together.
Collaborate and moved quickly on ideas that will help us move our company forward flow.
Focusing on the positive and drive innovation and insight wherever you can through your hard work, we are building a better faster stronger spectrum brands and it's an absolute privilege to be a part of this great team.
Now I'll turn the call back over to Kevin to take any questions. You may have thank you David Lisa Let me jump right into Q net.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Nik Modi with RBC capital markets.
Yes, good morning, everyone. Congratulations on a great into New York.
Dave maybe you can just help frame how to think about and there's so many moving pieces you guys have been very active lot of initiatives. So maybe you can just talk about results and kind of how you think about the guide as a result.
Following kind of vectors share gains.
Organizational design changes that you made and maybe any specific examples.
Key wins that you had during the quarter.
Then just kind of underlying category growth. So just we can understand.
How how much you guys have underperformed relative to that overall category. Thank you.
Hey, Thanks for the question, Nick and appreciate free she's joining the call.
Look let me let me just say.
There's nothing there's no rocket science here I mean, when you investing people talent R&D consumer insights innovation in marketing.
Your inputs just lead to better outcomes and at the end of the day of this.
This is this quarter. This this year and finishes is really the amalgamation of a lot of hard fundamental work that we've done since 2018 and.
It all begins and ends with culture I mean, we've got we've cut 12000 employees now that not only resilient they not only get the vision strategy that they not only bought off on on vision clarity focus of the faster smarter stronger spectrum.
They are seeing the tangible benefits in their day to day lives in their business units from the productivity dollars that we freed up from the goal productivity improvement program.
They are seeing the ability to reinvest those dollars and to really create exciting product.
For our retail partners for the consumer, but I would tell you today, we're probably taking market share.
Across the board I think we can do re doing even better quite frankly in AG job right. I mean look the good news of that I have to tell you is this.
This isn't just the the ended the year or we did great for one quarter. What we've got today is our feeder on solid ground. We've got a sustainable model. We finally achieved what I call escape velocity on a flywheel and now we're plowing money back into it to continue to accelerate things going forward. So we just look.
I hate guidance, we had a big debate over whether or not to give guidance.
We do want to give you something free for your models going forward.
But.
At the end of the day.
I think what we've given you is hopefully a very achievable.
Great I'll pass it on.
Your next question comes from the line of Olivia Tong with Bank of America.
Great. Thanks, good morning Congrats.
Let me start with RBC. Your your growth rates are very strong. So what do you can elaborate on a couple of things first.
Where you think you are.
Underlying growth rates are in your share position and then and then second what you think.
Companies in these categories and then just the sustainability net net.
Gary obviously at these levels, but if you could just impact sort of how.
How much was catch up.
You talk about how much you Lisa.
Go to the 10 million or so to recover.
Incremental $10 million, but just if you could talk about some of those three things that would be great. Thank you.
I'll turn the call over to others, but I guess my first comment would be I think we're trying to give you a view it what's core and sustainable with hopefully the guide.
You know for 21, but I, but I think that's.
Currently right now even if I think what you're asking is even if we're benefiting from coal would if you strip that out I think our growth rates are very very healthy.
And you.
We're going to continue to be able to talk about that as we move through the year.
We do want to help you in terms of obviously, we had supply disruptions.
You know in in March and April and then they lingered a little bit and we're just getting the fill rates Bakken replenishing retailer inventories, obviously that those bolster the growth rate.
To be above what we view as sustainable which is what which is which is part of what we reported today, but I think going forward, you're going to see very very healthy business.
And my goal is by the end of this year all four business units are taking market share in a growth at all four business units are growing above category, but let me let me, let me flip it to Randy to give you more detail more.
Good morning Olivia.
I guess I would say channel.
Trying to discern exactly what the underlying growth rates and share positions are as has been obviously a bit difficult with all the moving pieces in the macro sense, but in our reported channels we are.
Increasing our share position in most all of our major categories.
And what what the driver of that is what we're focused on trying to understand now that the good news is as David pointed.
Weighted out several times from the call.
We feel really good about the general overall health of the of the business and the way we're performing we do not believe that our results are driven in.
In a temporary fashion based upon kobin as a matter of fact, when you look at the full year. We still believe that was a net negative draw on our top line and our bottom line.
So.
We feel good that our categories are not likely to see any dramatic reduction in.
Total.
Related demand anytime soon.
So we we.
We think that the underlying growth rate for US is like David said is represented fairly well in the guidance we've given.
Got it thats helpful. Okay.
Okay great.
And then just flipping over to net cost savings program. The tanker program clearly, you're you're progressing well and now this is in the range.
Your targeted savings. So can you can you talk about where the incremental savings are coming from and then just.
Flip side, the thoughts on areas of reinvestment.
Sure. So let me a part of this was just making sure that we were.
Conservative in our communications to you as we had internal targets to overdrive to the numbers that we were originally looking at and as with time has gone by that the organization has done a fantastic job of delivering on on expectations in many cases over delivering so this is about pre.
Premium execution to most all of the inning.
Initiatives and attributes within the program.
So so savings has come across I think we've shown either six major work.
Workstreams within the G that program the.
The largest of course is in the sourcing and strategic purchasing areas, but overall all of the work streams are delivering at or above the original expectations and that's what's allowing us to have more and more confidence in our ability to deliver over the next.
12 to 18 months.
Great. Thank you best of luck.
Thanks next question. Your next question comes from the line of bottom line.
CJ Securities.
Good morning, Congrats on a great quarter there 40.
Morning, Bob reported.
Wanted to start with a question on operating leverage obviously, you're getting tons of cost savings from GE Pippin, you're reinvesting them and you're increasing your R&D and advertising and promotion and stuff. So.
When should we start to see.
When do you catch up to where you want to be in terms of your sustainable investment in the brands and when do you reach that balance that you return to more.
Expected operating leverage based on the.
Revenue growth going forward.
From a look we're seeing you can see operating leverage in the margin structure this quarter.
And you know.
I think.
We have been.
We have been the first the first year of the program, we had an exceptional amount of tariff headwinds and we were not able to invest back in the business like we really wanted to.
In 2019, I think this past fiscal year, Weve really turned the investments up and.
We're seeing a pretty fast payback and so I think it's our fiduciary obligation to do that but I think we've also got a couple more years in front of us of country.
Continuing to invest and get the vitality the product mix the margin structure lift and the higher growth rate.
I'll turn the call over to this question to Germany, and Randy, but I see a solid 24 months more of what we're doing in terms of.
The innovation that we can provide our retail partners, our consumers really continuing to lift the organic growth rate of the company with higher margin structures.
And as long as we can continue to do well supply chain fulfillment.
And maximize output in our in our facilities continue to have to absorb our fixed costs in a better manner.
Also yeah, I think Bob if.
If you pull back the layers a little bit both on 20, and the 2021 guide you really do see nice leverage. So a reminder, on 20 right we were facing into $65 million to $70 million of additional gross.
Tariffs from fiscal 19.
Fiscal 20.
We delivered a lot of savings, but we also invested right. So our spend our it spend rates are calm op spend rates our EPS.
Advertising and promotion spend rates are all up year over year and F 20, and yet we still delivered growth before the adjustment we delivered $597 million of adjusted EBITDA. So I think that really demonstrates pretty strong leverage with some smart reinvestments. If you look at the guide for up to 21, which obviously presumes.
Growth in the overall environment.
You see really good leverage you see an incremental $25 million or so of net tariffs on some of the exclusions that we had an f. 20 role all rolled off in August of 2020.
But you see a budget for additional incremental spending in all the areas that I. Just mentioned obviously those are decisions that we make as we move forward we measure ROI.
And we can we can decide to ramp that up further we can decide to tamper down to make sure. We have the right talent driving that spend to make sure we get return for our shareholders and that's the way, we'll kind of think about it.
As we think about the overall level.
In F 21 of spend in all those areas assets.
As compared to the ideal level, where we want to be it's probably still a little bit light, but I would say that the budget for F. 21 reflects probably the largest increase that we would expect to see an overall organizational spending around operational excellence and consumer insights.
Okay, great very helpful. Thank you.
And then just regarding your brands I think you have like 18 or 19 core brands that you're supporting is that the right number for the business to leverage your advertising and promotional dollars.
If not what is how are you thinking about that.
Seemingly a lot of brands going forward.
So our top 15 brands make up around 80% of our revenue Bob across the four business units I'll, let Randy talk we've done a lot of brand and SKU rationalization over the last couple of years, let Randy jump in on his thoughts on the overall number yes, Bob. It's obviously a great question something we spend a lot of time on.
And it various by.
This this unit as well as categories and channels and so.
We play in a space, where oftentimes brands are very important to the identity of particular product or to optimizing particular channels or customers and so we.
We've had substantial rationalization of the brand portfolio over the last two years during our improvement initiatives and where we're still in the process of continuing to do a lot of rationalization work, but the top brands are the ones that were.
Currently very committed to and we will be putting most all of the drive behind.
Yeah, I mean look let me just.
This may seem a little bolt.
This company is no longer content to be a number two or number three player we want to be number one.
And youre going to see a lot of these brands over the next 12 to 24 months become number one player.
Across the board.
All right sounds great all right thanks very much.
Thanks, Bob.
Your next question comes from the line of Faiza Alwy with Deutsche Bank.
Yes, hi, good morning, and congratulations on a really strong EBITDA.
I have two questions one is going back to the categories and segments.
With respect to your guidance are there any particular segments that do you expect to overperform or outperform.
That guidance and I'm, specifically thinking about your outlook.
Outlook for H. I know it sounds like things are really good do you have the backlog for the fourth quarter. So I'm curious, how you're thinking about that business.
In the back half of the calendar year next year.
And then my second question is I, just wanted to take a step back and and maybe David.
Alright, Jeremy if you could talk about.
The it seems like the company has come a long way just in the last 12 to 18 months and I just love to hear some examples of what are some of the things that you're now what are some of the actions that you've taken and what are some of the things that you're able to do now just operationally whether it's from an IP perspective, you've mentioned automation.
Mentioned commercial improvements what are some of the things that you're able to do now that you maybe weren't able to do sort of 12 12 to 18 months ago.
Let's let's go in reverse and then the whole team or spawn because this is obviously the this is the flywheel component that we talked about on the top of the call that is really the thing. That's got me most jazzed about the future performance of the company.
We now have a brand new calm ops team, we have real consumer insights, we have tremendous E com and digital and AI learning tools in the company that we never had before we had that gives us an ability to get real time data to really see into what the consumers are looking for what the needs are how we can make the products greater.
Efficacy greater benefit greater convenience and the ability to produce those products through R&D innovation, we've built entirely new R&D teams in some of these verticals and so now we're able to take the concept proof get it get it get a prototype test it and get it to market and speeds.
We could have never done before as a company and so that's that's feeding this innovation pipeline, the new product launches, which is accelerating the top line and giving us a higher margin structure. That's the general theme. That's the flywheel and then obviously that creates greater cash flows greater profitability, which allows us to continue to fuel that as we go forward.
The simplistic from.
The way I would describe it Randy.
Yes, I think David's comments are spot on I mean.
We're really focusing on creating business units that are challenged with understanding their end consumer and retail channels in a way that day can solve the problems for them and drive brands product and channel growth and then we're taking all the ancillary disc.
Attracting non value added activities that often times businesses have to deal with and we are centralizing those with people that are outstanding talent and proven leaders in the industry, so whether that be supply chain or will that be transportation or whether it be demand planning whether it be controllership. These are things that used to.
In the interim.
In our businesses.
And distracting day to day.
Versus the efforts to.
Create new products that consumers want to buy and retailers want to sell and so as we strip away those non value added pieces and really get the talent in the businesses and say you know to spend as much time as possible on the innovation cycle, it's really starting to pay off.
And then on your first question.
What I would say is one we're not going to give specific segment guidance, but I will give you a little bit of color which is.
We would expect to the 3% to 5% the bias to the upside will be around global pet care as its been the last couple of years.
As well as a chart with the supply replenishment that Randy talked about and then I think prudently.
To the bias to the lower end of that range would be towards home and garden and HPC given the strong years that they had an f. 20 and the uncertainty around.
What happens with the pandemic as the year goes forward. So I think it's a pretty prudent and intelligent guidance. The color I'd give you and we'll just update you as each quarter progresses, we get into the year.
Great. Thank you from much very helpful.
Thank you.
Your next question comes from the line of Ian Zaffino with Oppenheimer.
Hi, great.
A couple of questions here I guess first one with the day that you mentioned the terra headwinds.
Well, if we're looking at maybe potential softening of some of the stance on China, what's the actual net yes.
You could stand to gain let's just say the tariffs do go away because.
Well you have the terrorists y'all seem to offset it with some pricing so maybe help us understand what the what the net impact would be.
And what the puts puts and takes would be if that happens.
And then I have a follow up thanks.
Sure I mean, let me let me weighted on the front end we were actually.
We're going to have more tires. This year is there going to be there going to be tariffs.
They're going to grow at a slower pace. So it's it's a lessening of the headwind is not an elimination of the tariffs and I would say right now as we sit here today.
We're not we're not planning for any sort of sort of tariff relief.
Andy.
Go ahead Randy post.
Well I mean early commentary from the Biden camp doesn't indicate any.
Early softening on stance with China. So it's David's point, we're not going to plan for that.
Does something happen in fiscal 22, perhaps it does but early indications are not headed that direction.
As it relates to what happens in the theoretical if they do go away it would depend on how they go away and outlets and how its communicated but the reality is that it's been a share challenge across Pos across suppliers across retail partners and ourselves and companies like us and it would be a shared commerce.
Conversation around what happens with the unwind of that as well Randy could probably give you a little more color and I would just I would just say I don't think anybody would think of it as a windfall in the event that there was a reversal terrace, but I think that we think will be the most excited about is.
If those tariffs were able to flow through all the way to the consumer actually driving volume and getting benefit that way, but.
No again as David said, we're not currently modeling anything based upon what we are hearing.
Early on in the change.
Okay and then.
Second question I guess from two other questions would be what was the motivation.
In the change in the form of compensation.
What drove that decision and then also what's your decision on the leverage ratio change you lowered the low end of the range, while keeping the high end at the high end so.
Just some color on that that's it thank you.
Yes, a real quick on the on the comp adjustment.
This company for four or five years or procurement or how many but as you know there is funders of employees in the organization that have literally there only cash compensation came from the former their base salary and so their annual mill was always paid in equity and we were listening to shareholders. During a loss proxy meeting they wanted.
And less of a burn less equity issued less dilution from the management team.
Our comp consultants viewed it as highly unusual to pay a pay onetime bonuses and equity they prefer that to be paid in cash.
Actually it helps us retain people and attract talent better. So it's we obviously had a great finish to the year and and viewed as appropriate as a board of directors to make that change and quite frankly, just level sets us that's exactly what our peer group does I think it makes us a more attractive place where.
Big part of the fundamental change your started two years ago is I wanted to upgrade talent and in making that change is going to allow us to attract a higher higher caliber players to our company as we continue to accelerate the growth going forward.
In terms of the leverage ratio question that you asked its just so prices for companies remain elevated.
You know we are laser focused on we spent two years doing the hard work getting the fundamentals going in the right direction, we feel very very good about our outlook fundamentally we think it's time for our share price to start performing and we want to continue to de lever the balance sheet and execute a higher growth rates greater free cash flow per day.
Function.
And we think you know continuing to de leverage be prudent with the balance sheet maintaining tons of liquidity and.
And drive much higher quality earnings streams going forward is going to cause our multiple to expand.
So that's that's what we're doing.
Thank you.
Your next question comes from the line of Tim.
Crespi Hardt.
Hi, Thanks for taking my question.
You mentioned in the prepared remarks, I'm expanding Remington into China, just curious.
What potential you see for that brand in China. If there are any other brands, where you see the potential to go into China, and then just more broad line.
Other opportunities to expand overseas.
What you think the international penetration of the business could be thanks.
I think look the Chinese opportunity really follows again that this new approach, where we're really advertising the brand remingtons one of our strongest.
Global brands and with Manchester United Football team.
They've got hundreds and millions of followers in mainland China and.
And so it's just it's just a natural extension of the brand to be able to launch it in the China Germy Randy any other color on the GAAP very consistent.
Thanks, and then just on HPC.
Margins were down despite solid growth this quarter you mentioned.
Higher advertising promotional investments.
There was a shift from earlier in the year in terms of timing or are those investments expected to drive growth next year and then what do you see as the real margin potential for that business over time.
Yes, Jim I think you hit it. So in Q3, we were fairly restricted on supplies. So we pulled back on an awful lot of investment in that business as we caught up in Q4. Some of those expenses came back but on top of that we put the flow.
Substantial investments into Q4 in preparation for holiday Inn in the current quarter. So a lot of what you see in the margin in Q4 of HPC.
Is designed to benefit from fiscal 2021.
I think the longer term day, we've we've said many times you know we're working to get this business back to low double digit EBITDA margin, we think that thats the right place for it to be given the current macro environment.
Great. Thanks best of luck.
Okay. Thanks, Jim.
Your next question.
Question comes from the line of William Reuter with Bank of America.
I guess just one from me you got the the Armitage acquisition that you'll be in the midst of integrating I guess your outlook for additional M&A and.
I guess, maybe how you're thinking about the capital structure you have the the 2024 notes that are relatively small, but with a relatively large coupon I guess thoughts on taking those out with cash versus refinancing that's it. Thanks.
Yes look we got lots of levers to pull from you know again when you when you when you start really driving the fundamentals of the business it creates a lot opportunity.
Like I said I think we still believe our stock is materially undervalued we.
We believe that accelerating the top line growth for the business expanding the margins de leveraging the balance sheet.
Drive pretty good shareholder returns over the next couple of years. So that's really the focus we are still wide open.
Tuck in acquisitions that are within our wheelhouse that create a lot of synergies, but also have the potential to create a lot of shareholder value.
Over the long run and so we'll continue to weigh that but.
No. It's I think look if you look back Mike My kind of first 10 years here was all about allocating capital external to the company and doing quite large M&A I would think over the last two years in my new role all the energy has been really mostly exclusively around investing internally into the company allocating capital internally and so really.
We're in a period.
We're just trying to drive the organic growth rate of the business have number one market share across our business units and really drive excellent shareholder performance. So that's that's that's that's the that's the chapter we're in right now.
Okay, and I guess with regard to the 20 force any thoughts on that maturity specifically.
Very expensive paper relative to where we can borrow or figured out with cash we'll let you know in December.
Sounds good thank you.
And we have reached our allotted time for questions are there any closing remarks.
I know we have a couple of people left in the queue. We've obviously gone over the hour, but Kevin and myself will both be available to follow up anytime you're ready. Thanks for your time.
Thanks, everybody. Thank you.
This concludes today's conference you may now disconnect.
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