Earnings Call Transcript - SPB Q1 2022

Operator, Operator

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. Please be advised that today's conference is being recorded. And if there are any questions during the call, 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.

Jeremy Smeltser, CFO

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 those 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.

David Maura, CEO

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. We plan to keep returning cash to shareholders through dividends and share repurchases. In the last quarter, we bought back around 1.1 million shares of our common stock for $110 million, and recently finished a $150 million buyback plan that was approved by the board. At our recent board meeting, we authorized another $150 million for repurchasing our shares, and as we approach the closure of the HHI transaction, we may increase our share repurchase efforts. We will also continue pursuing disciplined and strategic mergers and acquisitions that are synergistic and contribute to long-term value creation. Today's announcement of the Tristar acquisition speeds up our goal of forming an independent appliance company. We believe that this separation, resulting in a focused Pet, Global Pet, and Home and Garden company, will lead to a re-evaluation of Spectrum Brands common stock and generate significant shareholder value. As mentioned in prior calls, we aim to reduce our balance sheet leverage to about 2.5 times gross leverage by the time we close the HHI sale. Furthermore, we have revised our long-term net leverage ratio to a more conservative range of two to two-and-a-half times net leverage. Before handing it over to Jeremy, I want to recognize the efforts of our global teams who have worked hard to lessen the impact of supply chain challenges on our consumers, retail partners, and the business overall. Our supply chain team, supported by our globalized operating model, has found innovative ways to ensure product delivery to our customers. I appreciate the dedication of all our global employees and management teams who have persevered through numerous challenges over the last few years. Their achievements exemplify our winning culture and the effective implementation of our operating model, which inspires me daily. Now, Jeremy will provide further insights on our financials. Over to you, Jeremy.

Jeremy Smeltser, CFO

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 $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 have 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 compensation 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 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 U.S. 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 planned 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 hitting our cost lines and then continued increasing pricing actions taking effect as the year progresses. 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.

Randy Lewis, COO

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 significant 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 or 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 in 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 earning us 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 under the Russell Hobbs brand in 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, 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 quarters of revenue growth for the business. As 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 licenses 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 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 remained 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 and 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 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 innovations in order to drive demand for our portfolio of leading brands. The team is particularly excited to see the continued strong demand for the consumables products 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. 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 enjoy 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 $140 million has been achieved thus far. To end my section, I want to thank all of our global employees for the progress we've made in our operating model, cultural advancements, and our strategic initiatives. 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.

David Maura, CEO

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 divestiture is 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 a higher inflation impact for the full year of $310 million to $330 million, we are putting in additional pricing actions and other countermeasures to deliver low single-digit EBITDA growth for the year. We remain encouraged by our consumer demand for 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.

Jeremy Smeltser, CFO

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

Operator, Operator

Thank you, sir. As a reminder to ask a question, please press *1 on your telephone keypad. And our first question comes from Peter Grom of UBS. Your line is open.

Peter Grom, Analyst

Hey. Good morning, guys.

Jeremy Smeltser, CFO

Good morning, Peter.

Peter Grom, Analyst

Can you provide more context or background on the HPC transaction? How does the timing of the HHI closing affect your spending decisions regarding HPC? Additionally, can you share your thoughts on what influences the structure of that deal and your timing decisions? Finally, David, what do you consider to be the appropriate value for the new appliances business?

David Maura, CEO

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 Pet business of our caliber should trade, so that's what I'm trying to do to create wealth for our stockholders.

Peter Grom, Analyst

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 gets closer for HHI, you may accelerate buybacks. But can you maybe help us understand what that buyback program may look like?

David Maura, CEO

We recently purchased $150 million worth of stock, and a decline in the share price is beneficial for us. We prefer buying back stock at a lower price. If you are not confident in our strategy, we are willing to buy your shares and reduce the float. As we approach the $4.3 billion in proceeds, I truly believe that our Pet and Home & Garden businesses should be valued at 14 to 15 times EBITDA, while the market is valuing our company around seven times. Therefore, the best way to create wealth is to continue buying back stock. We are currently in a regulatory review and are confident the deal will close, though it will require significant effort. We can't provide a specific closing date, but when it occurs, I intend to de-lever. Depending on our share price and market valuation, we will keep you updated on our actions in that regard. Given that our stock is here and we have about $3.5 billion in net cash proceeds, we plan to buy back a substantial amount more shares.

Peter Grom, Analyst

Got it. Thanks so much and best of luck.

David Maura, CEO

Hey, thank you. Appreciate your questions.

Operator, Operator

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

Robert Labick, Analyst

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

Jeremy Smeltser, CFO

Good morning, Bob.

Robert Labick, Analyst

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?

David Maura, CEO

I'll start with a broad overview, and then Randy and Jeremy will provide more specific details. We are in an extraordinary time. The rise in input costs is significant. In some cases, our freight costs have increased tenfold, and some other costs have risen by 45%. We're not thrilled about needing to raise prices. Our retailers understand, and we believe that inflation at this level isn't beneficial for consumers. That said, consumers still seem to have plenty of cash, and our demand remains strong across the board. We're grappling with a fragmented and inefficient supply chain, which is taking longer to resolve than we'd like. Unfortunately, price adjustments are necessary to restore our margins, which is our responsibility. I am committed to making that happen. We expect to see margin improvement in every remaining quarter this year. Now, I'll turn it over to Randy and Jeremy for more details.

Randy Lewis, COO

Sure. Bob, you inquired about the details, and essentially it's an analysis of profitability at the item level that relates to the increase in costs. As David mentioned, in this environment, we prefer not to focus on price increases, but unfortunately, it's necessary to do what's best for the business. We're adjusting prices as needed. Regarding the last 20%, I don't want to suggest there is a lingering issue that will take time to resolve. It's simply a matter of timing related to the new insights we have on longer-term freight costs that will extend further into the fiscal year than we initially expected. I do not foresee any increased risk in execution related to that. Concerning competitive response, as David noted, we're entering uncharted territory, and our buyers, retail partners, and competitors are all navigating this together, seeking to do what's best for the categories and the consumers. Therefore, I don't believe there are any significant competitive issues affecting most of our businesses. We're relying on our brand positions, whether we're leading or following, but there isn't a major dynamic impacting us in that area.

Robert Labick, Analyst

Okay. That's very helpful. Just one more question before I turn it back to the queue. Regarding the HPC numbers, you provided the combined figures, and we know that the margins for HPC in calendar 2021 were affected by inflation. Could you remind us what a normalized margin looks like for the core Spectrum HPC segment before the Tristar, moving forward? I'm trying to assess the earnings potential of the new entity once margins stabilize.

David Maura, CEO

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.

Jeremy Smeltser, CFO

I agree. Reflecting on the significant inflation we began to experience last year, we reported $125 million in EBITDA on a trailing twelve-month basis, which placed us in the low double digits. As inflation has impacted us, we've seen a couple of quarters fall into the low to mid-singledigits. However, with the strategies we have implemented, I believe we can reach the higher single digits this year, and we'll have to see how inflation and demand play out next year. Overall, I still view this as a low double-digit margin business, around 10%, given our current product mix.

Robert Labick, Analyst

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

David Maura, CEO

Thank you.

Jeremy Smeltser, CFO

Thanks, Bob.

Operator, Operator

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

Christopher Carey, Analyst

Hey, good morning.

David Maura, CEO

Morning sir, how are you.

Christopher Carey, Analyst

Am not too bad. Happy it's Friday. Can we talk about leverage? There is a lot of cash potentially in but a bit delayed because you're 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.

David Maura, CEO

You're correct in identifying the key issues. Currently, our leverage is increasing due to stock buybacks, and the supply chain challenges have persisted longer than I would prefer, consuming significant working capital. I'm committed to addressing this moving forward. Many companies in the consumer packaged goods sector have focused heavily on fill rates because of supply chain problems, but it's also crucial to improve our balance sheets. This will be a focus in the upcoming quarters. Additionally, when you model our performance, keep in mind the anticipated EBITDA decline in Q1, with a much smaller decrease expected in Q2. Our earnings on a trailing twelve months basis should start to recover between Q2 and Q3, and we expect a notable increase once pricing adjustments and inflation coverage are implemented. We are confident about a strong second half, which will reflect an opposite trend compared to the previous year. We are experiencing rising debt and earnings pressure due to inflation. I believe we reached an inflection point around June, after which conditions should improve significantly. Regarding HHI, I am quite certain it will close, but if it does not, it remains a solid business that generates substantial free cash flow. They would owe us a termination fee of $350 million, which would significantly affect our leverage. I believe we can manage our leverage through improved earnings and debt reduction, targeting around 3.5 times by year's end.

Christopher Carey, Analyst

That's incredibly helpful. If you could indulge me, there is a significant level of confidence in the deal closing. This organization is well-versed in finalizing deals in markets with highly consolidated shares. Can you provide some insight into where the regulatory review stands? Are regulators focusing on retail market shares, shares in specific channels like commercial, or on technology aspects, such as mechanical versus electro-mechanical lock sets? What is your perspective on why this deal, in addition to many deals undergoing secondary reviews, might be facing another look from regulators?

David Maura, CEO

Yeah, look, 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.

Jeremy Smeltser, CFO

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.

Christopher Carey, Analyst

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

David Maura, CEO

Hey, happy Friday. Good try, good try.

Jeremy Smeltser, CFO

Thanks, Chris.

Operator, Operator

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

Steve Powers, Analyst

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?

Jeremy Smeltser, CFO

Yes, that's correct, Steve. There is still some uncertainty regarding the timing of closing Tristar. I believe we mentioned within the next 90 days or so, so it would not be appropriate to include anything at this point. However, as time goes on and we gain certainty about the closing date, we will provide more updates as the year progresses.

Steve Powers, Analyst

Perfect. In terms of the steps you're taking to maintain that current guidance on the RemainCo despite inflation and supply chain pressures, you mentioned pricing earlier. I'm curious about the balance between incremental pricing for the rest of the year and incremental productivity. It seems that given the timeline for getting pricing to market, you need to rely on both. You touched on this in your prepared remarks, so I'm interested in the balance. Additionally, if there is significant productivity to implement in the second half, can we view that as structural productivity that extends into 2023 and beyond, or is it simply fiscal 2022 cost-cutting to get through this year before resetting for next year?

David Maura, CEO

Randy will take that one. Thank you.

Randy Lewis, COO

Good question, Steve, and I would tell you that most of the adjustment is coming through pricing actions. The 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.

Steve Powers, Analyst

Okay, that's helpful. Randy, while I have you, can you share your thoughts on the measures you're implementing to enhance supply chain status and service levels? How do you believe these efforts compare to your competitors? Will the initiatives you're pursuing to improve product availability merely keep you in line with the competition, or do you think there are advantages that could allow you to gain market share and distribution by outpacing your rivals?

Randy Lewis, COO

Yes, that's a great question. We are collaborating with several external experts and advisors to monitor our situation. As we operate in different markets worldwide, I believe we are generally in a good position compared to most averages, although there are some fluctuations. However, as the supply tightens, global suppliers are becoming more efficient, which limits opportunities for outliers in the current market. The key focus should be on how we are enhancing our manufacturing supply chain for resilience and flexibility in the future. It is clear that this will not be the last disruption we face in the next five years; there will be more challenges ahead. The crucial consideration is how we are preparing our networks to tackle the next unforeseen issue. While I wouldn't say we have a significant advantage, it certainly doesn't seem to be a disadvantage compared to our competitors.

Steve Powers, Analyst

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

Randy Lewis, COO

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

Operator, Operator

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

Ian Zaffino, Analyst

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 Tristar. 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.

David Maura, CEO

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 and 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 a game changer for 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, new and excitement. It's been something I've been trying to accomplish in 3 years I've 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 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 will need a couple of months to discuss this with the Board of Directors, but we aim to act quickly and inform our investors about our chosen path later this year. I hope this addresses most of your questions. Unfortunately, I can't discuss the valuation of a specific business unit.

Ian Zaffino, Analyst

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?

David Maura, CEO

We recently purchased $150 million worth of our stock. In fact, a declining share price is advantageous for us as it allows us to buy back stock at a lower cost. If you don’t support our strategy, we are willing to take your shares and reduce the number of outstanding shares. As we approach the $4.3 billion, if I believe that our Pet and Home & Garden divisions are valued at 14 or 15 times EBITDA and the market continues to value our company at around seven times, the best way to create wealth is to keep buying back stock. We are currently undergoing a regulatory review and are confident the deal will close, though it requires significant effort. We do not have a specific closing date to announce. However, upon closing, I plan to reduce our debt, and based on our share price and market valuation at that time, we will keep you updated on our buyback strategy. As of now, with approximately $3.5 billion in net cash proceeds, we intend to buy back a substantial number of shares.

Ian Zaffino, Analyst

Got it. Thanks so much and best of luck.

David Maura, CEO

Hey, thank you. Appreciate your questions.

Operator, Operator

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

Robert Labick, Analyst

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

Jeremy Smeltser, CFO

Good morning, Bob.

Robert Labick, Analyst

David Maura, CEO

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.

Randy Lewis, COO

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.

Robert Labick, Analyst

Okay. That's very helpful. Just one more question before I pass it back to the queue. Regarding the HPC numbers, you provided the combined figures, and we know that the margins for HPC in 2021 were affected by inflation. Can you remind us what a normalized margin would look like for the core Spectrum HPC segment before Tristar as we look ahead, so we can understand the potential earnings power of the new entity once margins stabilize?

David Maura, CEO

Listen, we used to run this business 10% margins.

Jeremy Smeltser, CFO

Yeah, I agree.

Robert Labick, Analyst

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

David Maura, CEO

Thank you.

Jeremy Smeltser, CFO

Thanks, Bob.

Operator, Operator

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

Christopher Carey, Analyst

Hey, good morning.

David Maura, CEO

Morning sir, how are you.

Christopher Carey, Analyst

Am not too bad. Happy it's Friday. Can we talk about leverage?

David Maura, CEO

Yeah. Look, you're hitting on the correct points.

Christopher Carey, Analyst

That's incredibly helpful. If you'll entertain me, there's a lot of confidence in the deal closing.

David Maura, CEO

Yeah, look, I'm really happy to entertain you on anything, but to answer all your questions around regulatory, I will not indulge you.

Jeremy Smeltser, CFO

Sure.

Christopher Carey, Analyst

Well, thanks for all that.

David Maura, CEO

Hey, happy Friday. Good try, good try.

Jeremy Smeltser, CFO

Thanks, Chris.

Operator, Operator

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

Steve Powers, Analyst

Jeremy Smeltser, CFO

Yeah. That's right, Steve.

Steve Powers, Analyst

Perfect. In terms of the steps you're taking to maintain that current guidance on the RemainCo despite inflation and supply chain pressures, you mentioned pricing a bit earlier.

David Maura, CEO

Randy will take that one. Thank you.

Randy Lewis, COO

Good question, Steve, and I would tell you that most of the adjustment is coming through pricing actions.

Steve Powers, Analyst

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.

Randy Lewis, COO

Yes, great question. We're working with a number of external experts and advisors to help us keep a track on that.

Steve Powers, Analyst

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

Randy Lewis, COO

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

Operator, Operator

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

Ian Zaffino, Analyst

Hi, great. Guys, thank you.

David Maura, CEO

Yeah, man look, I got to get there first.

Ian Zaffino, Analyst

Totally understood. And maybe just following up on the comment around the proceeds for HHI.

David Maura, CEO

Look, we just bought a $150 million worth of stock the other day.

Ian Zaffino, Analyst

Got it. Thanks so much and best of luck.

David Maura, CEO

Hey, thank you. Appreciate your questions.

Operator, Operator

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

Robert Labick, Analyst

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

Jeremy Smeltser, CFO

Good morning, Bob.

Robert Labick, Analyst

David Maura, CEO

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.

Randy Lewis, COO

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.

Robert Labick, Analyst

Okay. That's very helpful. Just one more question before I turn it back to the queue. Regarding the HPC numbers, you've provided the combined figures, and we know that the margins for HPC in calendar year 21 were affected by inflation. Can you remind us of what a normalized margin looks like for the core Spectrum HPC segment before the Tristar, as we're trying to assess the potential earnings power of the new entity once margins stabilize?

David Maura, CEO

Listen, we used to run this business 10% margins.

Jeremy Smeltser, CFO

Yeah, I agree.

Robert Labick, Analyst

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