Earnings Call Transcript - SPB Q4 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the Fourth Quarter 2023 Spectrum Brands Holdings, Inc. Earnings Conference Call. At this time, all participants are in a 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. I would now like to hand the conference over to your speaker today, Faisal Qadir. Please go ahead.

Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting

Welcome to Spectrum Brands Holdings Q4 and full-year 2023 earnings conference call and Webcast. I'm Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we have placed a slide presentation on the events calendar page in the investor relations section of our website at www.spectrumbrands.com. This document will remain there following our call. Starting with slide two of the presentation, our call will be led by David Maura, our Chairman and Chief Executive Officer, and Jeremy Smeltser, our Chief Financial Officer. After opening remarks, we will conduct the Q&A. Turning to slide three and four, our comments today include forward-looking statements, which are based upon management's current expectations, projections, and assumptions, and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated November 17, 2023, in our most recent SEC filings and 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 statements. Also, please note we will discuss certain non-GAAP financial measures in this call. Reconciliation on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website in the Investor Relations section. Finally, we encourage you to listen to our remarks today alongside reading Spectrum Brands' press release and 8-K issued today and our annual reports on Form 10-K once it is filed with the SEC. Now I'll turn the call over to David.

David Maura, Chairman and Chief Executive Officer

Hey, thank you, Faisal. Good morning, everybody, and thank you all for joining us today. As we wrap up a very challenging and rewarding year for our company, I'd like to start this call by expressing my gratitude to every member of our global team for helping navigate our business through some very difficult times in fiscal '23. I would also like to thank our investor base for their confidence and trust over the past two years as we battled through and overcame operational and M&A regulatory challenges. Moving to slide six, we started fiscal '23 with a challenging macroeconomic environment, with consumer demand declining from the heights of the pandemic and our retail customers' inventory strategies driving significant demand volatility. Our margin structure was still under pressure from the inflation hangover in our inventory that was acquired in fiscal '22. And our leverage ratio was very high with declining EBITDA and high working capital commitments at the same time. We were also facing the legal challenge of the DOJ that was trying to block the sale of our HHI business. In the face of these challenges, our company not just navigated these obstacles successfully but is now beginning to turn a corner. We've successfully defended against the legal challenge, and we closed the HHI deal for $4.3 billion in cash. With the close of this transaction, we have now become a net debt-free company as we ended the year with $1.9 billion of cash and short-term investments against a total debt position of $1.6 billion. On the working capital side, we've made great progress, reducing our inventory by over $300 million since the beginning of the fiscal year, while also importantly improving our fill rates across all businesses. We have also unwound any early pay and factoring programs across North America, which used approximately $250 million of our cash during the year. We have now completed the exit of all early pay and factoring programs in North America, with the remaining cash flow impact from those exits extending into the first quarter of this fiscal year. We've also improved the margin structure of our businesses and started to invest back in our brands. Our most recent quarter marks the beginning of a strategic pivot from defending against the various headwinds presented to us in fiscal '23 to leaning into the opportunities that our strong balance sheet and improving margins present for us as we enter fiscal '24. Our retail partners are enthusiastic about the partnership potential in the future, and the team is energized to embrace this new reality. We have recently hosted fireside chats, sales and marketing meetings, and product relaunches around the globe to re-energize our teams and to strategically position ourselves ahead of what we perceive to be deteriorating global macroeconomic conditions. With that context, I'll have you now turn your attention to slide number seven for a quick overview of fiscal '23's results. As I mentioned earlier, this was a challenging year for the business. We faced a variety of headwinds. The difficult consumer environment and retailers' focus on excess inventory reduction impacted our results across the board. Our net sales declined by 6.8% compared to fiscal '22. We continue to experience these pressures in the fourth quarter, but the pace of the sales decline has slowed down considerably, with fourth quarter net sales decreasing by just 1.2%. Fortunately, we were proactive with our countermeasures earlier in the fiscal year, and we initiated further cost savings following some cost out actions during the second half of fiscal '22, including fixed cost reduction through the elimination of permanently salaried headcount, as well as a reduction in our advertising and promotional spend. All these actions have mitigated some of the EBITDA decline from the various economic headwinds. With the HHI transaction now closed and our balance sheet strengthened, we have started to invest back in our businesses during the fourth quarter, and we expect to continue this investment throughout fiscal '24. Our fourth quarter saw increases in our OpEx driven by renewed advertising and promotional spend. Jeremy will cover the fourth quarter results including business unit performance in more detail in his section. Moving now to slide eight, the actions we've taken in fiscal '23 have put us in a great position for this fiscal year. We are now operating from a position of strength with a strong balance sheet, healthier margins, and a much better inventory profile. In our fourth quarter, we have started the pivot of our business from managing for cash to now focusing on driving long-term growth across all of our business units while driving operational efficiencies at the same time. Our plan for fiscal '24 will build on this strategic shift and focus on three key elements. One, we're investing behind our people to improve our commercial capabilities and drive a culture of accountability. Two, we're investing behind our brands and our new product roadmaps as we continue to focus on bringing fewer, but bigger, and better innovations to the market. Three, we're investing in our operations to drive efficiency and reduce costs. Starting with the first element, we've made several key hires in senior sales roles and marketing positions across the company. We are intentionally focusing on investing in our people and upgrading our talent, which will materially bolster our commercial operations and innovation capacities. Post the sale of HHI, we are committed to cultivating our culture and our teams with the goal of shifting our organizational mindset from defense to offense. Regarding our second key focus, we are investing behind our brands and products with a material increase in our advertising and marketing spend in the fourth quarter, and we will continue to invest in our brands and new innovations going forward. This includes expanding into adjacent categories, as recently demonstrated with our patented Meowee! and Good N Tasty Cat Treats launched during fiscal '23, as well as new innovations across several products, including our Spectracide one-shot platform and our recent global Remington launch earlier this week in New York City with our innovative Remington 1 range. The third area of our investment strategy focuses on our operations aimed at driving efficiencies and reducing costs. This will come in the form of new equipment, better tools, and improved capabilities, with a focus on speed and automation to drive manufacturing and supply chain efficiencies. The goal is simple: to lower costs so that we can remain competitive in today's marketplace. Moving to slide nine, in our high-level fiscal '24 earnings framework, we anticipate continued suppressed demand in our home and personal care appliance segment, particularly within kitchen appliances. Given the outlook for home appliances and our decision to rationalize our product portfolio, we expect the top line to decline low-single-digits. From an operating EBITDA perspective, however, we are targeting growth in the high-single-digits, primarily driven by lower cost inventory compared to fiscal '23, offset by increased investments in our brands and people. We expect the cost environment to continue to ease, mainly from lower ocean freight costs, though these are offset somewhat by other inflation inputs, including labor, material, and FX. We also expect some pricing pressure in the home and personal care space as competition for shelf space remains fierce. As we set the earnings framework for fiscal '24, we are keenly aware of our need to regain investor confidence and to deliver on our commitments. We believe the fiscal '24 earnings framework provides for challenging, but achievable financial goals as we head into a time of greater economic uncertainty. Now you'll hear more from Jeremy on the financials and the business unit updates, and I'll be back for closing remarks. Over to you, Jeremy.

Jeremy Smeltser, Chief Financial Officer

Thanks, David. Good morning, everyone. Let's turn to slide 11 and look at our Q4 results, beginning with net sales. Net sales decreased 1.2%, excluding the impact of $11.3 million of favorable foreign exchange. Organic net sales declined 2.7%. Organic net sales were lower primarily due to lower consumer demand for the kitchen appliances category and the impact of our decision to exit several non-strategic categories and SKUs in our global pet care business. Gross profit increased $4.9 million, and gross margins of 33% increased 100 basis points, driven by favorable pricing compared to last year, and the favorable impact of cost improvement actions, partially offset by unfavorable transaction effects. Excuse me, SG&A expense of $222 million was flat at 30% of net sales, driven by increased marketing and advertising investment in the business, offset by reductions in distribution costs related to prior year disruptions. Operating income was essentially flat at $16.2 million. Our GAAP net income and diluted earnings per share increased due to interest income, lower interest costs, income tax benefit, and the lower share count. Adjusted diluted EPS increased 183%, due to the higher adjusted EBITDA, lower interest expense, and the lower share count. Adjusted EBITDA increased 52%, driven by gross profit improvements and interest income. Turning to slide 12, Q4 interest expense of $23 million decreased by nearly $4 million. Cash taxes during the quarter of $3.9 million were $3.4 million lower than last year. Depreciation and amortization of $23.6 million was $900,000 higher than last year. And separately, share-based compensation increased by $6 million. Cash payments towards restructuring, optimization, and strategic transaction costs were $18.4 million, down from $40.3 million last year. Moving to the balance sheet, the company had a cash balance of $754 million, plus $1.1 billion of short-term investments, and approximately $587 million available on our $600 million cash flow revolver. Debt outstanding was approximately $1.6 billion, consisting of approximately $1.5 billion of senior unsecured notes and $86 million of finance leases and other obligations. Additionally, as mentioned earlier, we once again ended the quarter in a net positive cash position. In October, we refinanced our revolver, reducing the total facility to $500 million to reflect the smaller size of our company after the HHI sale, and we extended the maturity to 2028. Capital expenditures were $14.7 million in the quarter versus $18.7 million last year. Let's turn now to slide 13 for an overview of our full-year results. Net sales decreased 6.8%, excluding the impact of $51 million of unfavorable foreign exchange and acquisition sales of $89.9 million; organic net sales decreased 8.1%. The sales performance was driven by the retailer's focus on aggressive reduction in inventory, leading to lower replenishment orders for our Home & Garden business, while home and personal care were impacted by continued post-pandemic category demand softness in kitchen appliances, as well as continued inventory reduction actions by our retailers. Global pet care business sales were only slightly lower, despite category declines in aquatics and our decision to exit certain unproductive SKUs. As companion animals showed resilience and posted another year of growth. Full-year gross profit decreased by $66 million, and gross margins of 31.7% increased 10 basis points, while the second half of the year gross margin of 34.4% increased by 150 basis points compared to last year as we continue to improve our margin structure across all businesses. Adjusted EBITDA increased 7% despite the sales decline, primarily driven by interest income, gross margin improvement, and a reduction in operating expenses. Now let's get into the review of each business unit to provide detail on the underlying performance drivers of our operational results. As you turn to slide 14, we'll look at global pet care. Reported net sales increased 1.6%, while organic net sales decreased 0.7%. Higher sales in our core companion animal categories were offset by the impact of portfolio rationalization as we exited from non-strategic categories, as well as softness in aquatics. Companion animal sales, particularly consumables, continue to show growth as favorable pricing more than offset unit declines due to slowing category demand. The aquatics category sales remain challenged compared to last year as consumer demand continues to reset from pandemic highs. However, in the aquatics category, we launched our Tetra STEM kit in the U.S. More than 65% of adults with aquariums had an aquarium as a child, so the STEM kits are a perfect way to capitalize on the educational segment to engage young consumers by bringing them into the category, helping them succeed, and hopefully become lifelong aquatics enthusiasts. We plan to introduce additional STEM products in the coming months. Adjusted EBITDA increased 10.5% to $53.5 million, driven primarily by the impact of net positive price, including the incremental pricing actions in the EMEA region earlier in the year. Q4 EBITDA also benefited from favorable mix due to the exit of low-margin SKUs and our continued focus on cost reduction measures, including the fixed-cost restructuring from the first half of the year. This was partially offset by advertising investments in the business, focused on driving short- and long-term volume growth. We feel great about the margin profile of the business and believe that it is in a strong position, as evidenced by the adjusted EBITDA of over $50 million for a second consecutive quarter. However, we are preparing for low sales and EBITDA growth in the short run as we have the continued impact of our SKU rationalization efforts in the first half of 2024, and as we continue to improve our overall inventory health and sell off aging and other discontinued inventory at a discount. Although we are closely monitoring consumer behavior and trends, particularly as it relates to discretionary spending patterns within the pet space, we remain confident about our position in the market with improved margin structure and the strength of our brands. We are shifting our focus to strategically investing more in advertising and trade promotion to engage consumers, drive consumption and top-line growth, and increase our share. Overall, we expect the positive trends in companion animal consumables categories to continue, albeit at a slower growth rate, and remain cautious about certain categories within the pet specialty channels, such as aquatic environments, as the rates of new entrants settle to at or even below pre-pandemic levels. Now we'll take a look at Home & Garden, which is on slide 15. Fourth quarter reported net sales increased 7.2%, driven by investment in advertising and marketing along with favorable weather conditions. POS for both controls and household repellent categories showed growth versus last year, while the personal repellent category POS declined during the quarter. Controls outpaced the category as Spectracide experienced double-digit POS growth and continued to gain share. Our Hot Shot brand also posted double-digit POS growth during the quarter. We increased our advertising investment and utilized highly targeted conversion tactics to help drive POS. Some of the increased advertising and promotional spend was focused on Spectracide. Floor care and restoration POS remained below last year and below our expectations as demand for cleaning products continues to decline post-COVID. We did see improvement sequentially as we increased investment in the category. We will leverage the positive momentum in our brands as we see consumers continue to recognize the efficacy and strong value of our products. We expect to continue to invest behind our rejuvenate brand to drive consumer engagement, higher POS, and eventually expanded listings. As we mentioned earlier, the shift in retailer strategy to maintain significantly lower inventory levels compared to 2022 continued to play out in our results. We believe that the impact of retailer inventory reduction is largely behind us, and we expect retailer orders to be much more in line with POS during fiscal '24. We are continuing with the commercialization of our recent innovations and plan to significantly increase our investment behind promoting our innovations and our core brands. In controls, this investment will support our base products as well as strong innovation in Spectracide. In repellents, our new zone, mosquito repellent devices, Cutter Eclipse, and Repel Realm continue to gain traction with consumers. We expect to significantly expand distribution and make it available across multiple channels in 2024. Adjusted EBITDA increased 60% in the quarter to $21 million. EBITDA increase was driven by higher volume and related fixed cost absorption impacts, positive pricing, and benefits of fixed cost restructuring and cost improvement initiatives undertaken earlier in the year. We experienced higher product costs from raw materials and labor in line with our expectations. Fiscal '23 was a challenging year for the H&G business, mainly due to the retailer inventory strategy, which led to disappointing top-line performance. Despite these headwinds, we were able to focus on margin performance and are pleased with the margin improvement in the fourth quarter. We believe that the fundamentals of the consumer market remain strong and that the H&G business is set up well for success in the future. As we look forward to fiscal '24, we expect our retailers to build inventory later in the season, which will pressure our first quarter and possibly second quarter sales. However, we are confident that we have the right manufacturing strategy to support that later inventory build. We are working closely with our retail partners to understand consumer demand expectations and how it translates into our production and shipment plans. Now finally, home and personal care, which is on slide 16. Reported net sales decreased 6.3%, excluding the favorable foreign exchange impact of $4.8 million; organic net sales decreased 7.7%. The organic net sales decrease was driven by category decline from lower consumer demand, mainly in kitchen appliances. Although the majority of the retailer inventory reductions are behind us, there continues to be excess retail inventory for air fryers in the U.S. market and significant decline in consumer demand from pandemic highs. Overall, kitchen appliance sales experienced double-digit declines in the quarter, but were partially offset by growth in personal care and double-digit growth in garment care. North American sales grew in personal care, garment care, and kitchen appliance categories with the exception of PowerXL, which was significantly impacted by lower air fryer sales. Sales in EMEA, APAC, and Latin America were all up double-digits with strong e-commerce growth and expansion of the PowerXL brand internationally. Adjusted EBITDA decreased 27.5% to $20.3 million, due to volume declines from kitchen appliances and the unfavorable impact of transaction FX. This was partially offset by lower ocean freight rates and savings from various cost improvement initiatives, including the fixed-cost restructuring undertaken over the past two years. The overall macroeconomic environment remains challenging, but our efforts to fix the profitability of the business are showing results. In fact, the gross profit margin for the business increased 600 basis points from the first half to the second half of the fiscal year. Earlier this week, we delivered our first-ever global Remington launch to support our innovative Remington 1 collection of multipurpose styling tools that deliver both convenience and performance. The range includes a two-in-one flat iron and curler, a multi-style dryer, and a shave and groom multi-tool. The brand generated significant reach and engagement via exposure on the ABC SuperSign in Times Square, a radio and social media campaign, a fleet of branded taxis in New York City, and culminated in a launch event hosted by iHeartRadio and Z100 Talent, where we welcomed retail partners, celebrities, influencers, and media. As we look forward to fiscal '24, we expect softer consumer demand, particularly in the air fryer and toaster oven categories, to continue and expect a continued challenging competitive environment in North America. We have also exited certain Tristar SKUs in fiscal '23 after assessing, among other things, performance and quality standards and the business risk associated with the continued support and distribution of these SKUs. Due to the difficult consumer environment and the exit of multiple products, we expect HPC sales to be down in fiscal '24, particularly in the first half of the year. However, despite the top-line challenges, we expect continued improvement in profitability as we benefit from various cost improvement initiatives and a comparison to prior year higher-cost inventory. Turning to slide 17 and our expectations for 2024, we expect net sales to decline low-single-digits, driven by HPC with foreign exchange expected to have a negative impact based on current rates. Adjusted EBITDA excluding investment income is expected to grow in the high-single-digits, driven primarily from lower-cost inventory compared to fiscal '23, offset by our investments in brands and people. As mentioned earlier, we expect the cost environment to continue to ease mainly from lower ocean freight, while other input inflation remains relatively mild. We also expect some pricing pressure in the home and personal care space as the competition for shelf space is expected to remain fierce. From a phasing perspective, we expect the impact of demand pressure in the home and personal care segment to be more pronounced in the first half, and particularly in the first quarter of fiscal '24. Our home center customers for the Home & Garden business are expected to wait until spring to take on inventory in preparation for the summer season. These factors, along with the product portfolio rationalization impact in the global pet care business will pressure top-line comparisons to last year in the first half. Turning to slide 18, depreciation and amortization is expected to be between $115 million and $125 million, including stock-based compensation of approximately $15 million to $20 million. Cash payments towards restructuring, optimization, and strategic transaction costs are expected to be approximately $40 million, down from $85 million in fiscal '23. Capital expenditures are expected to be between $75 million and $85 million. Cash taxes are expected to be between $45 million and $55 million. For adjusted EPS, we're using a tax rate of 25%, including state taxes. As a reminder, we are projecting to be a U.S. taxpayer in fiscal '24. To end my section, I want to echo David's opening comments and thank all the members of our global team for their strong efforts during some very challenging times for Spectrum Brands during fiscal '23. I am confident that we have the right actions in place to make fiscal '24 a successful year for us. Before I turn the call back to David, I would like to let our investment community know that we are transitioning our Investor Relations responsibilities from Faisal to Joanne Chomiak, our Senior Vice President of Tax and Treasury. Faisal has been managing IR for the last two years, and we've all enjoyed getting to know him. He's done a great job, and Joanne is going to do the same for us. It's a great opportunity for our finance leaders to meet our investment community, as well as you guys get to see the talent that we have in our company. So thanks to both of them. This quarter on your calls over the next week, Faisal will lead, and Joanne will be shadowing. Next quarter, we will reverse. Faisal will not go anywhere; he's going to return to his day job of strategic reporting, enterprise finance, and support for our Global Pet Care business. Over to you, David.

David Maura, Chairman and Chief Executive Officer

Thank you, Jeremy, and everyone, thanks for joining us again. At this point, let's take a couple of minutes and just recap some of the key takeaways. I think you'll find that on slide 20. First, our fourth-quarter financial results conclude a very challenging fiscal '23. We saw sales pressure from continued declining consumer demand for goods and expanding customer inventory actions, which drove significant top-line pressure for us. However, we proactively took swift action to reduce costs and implemented strict spending controls to get through the leaner times. We believe that with our balance sheet now strengthened and our margin profile improved, we're beginning to turn a corner. Secondly, our business is well positioned, and the time is right to start investing back in the business to fire up our growth engine. We are focused on bolstering our commercial operations, innovation, sales and marketing capabilities, and we're leaning into investing in our people and upgrading our talent. We also remain focused on launching fewer, bigger, and better initiatives and truly fueling them by investing resources behind the initiatives for successful commercialization. Third, we're investing in our operations, driving efficiencies and reducing costs. We will invest in our facilities and our supply chain capabilities to lower our product cost and remain competitive in today's marketplace. Lastly, we expect low single-digit net sales decline for fiscal '24. However, we do expect adjusted EBITDA to grow in the high-single-digits during the year without considering the impact of our investment income. We expect fiscal '24 to continue to be in a challenging environment, but we believe we've got the right strategies to succeed in the times ahead. Although we've had a tough couple of years, I believe we're very well positioned to improve our operating performance in fiscal '24. Fiscal '23 was all about managing our legal challenges and recapitalizing our balance sheet. Today, we are now reinvesting in our people and our brands with the goal of rebuilding our P&L. We are optimistic that fiscal '24 will show returns on these investments, and we believe our operating performance should accelerate into fiscal '25. I remain very optimistic about the future of our company. I believe we are well positioned to execute on our operational goals, deliver improved business performance, and provide significant value to all of our stakeholders. We can now go back to Faisal for questions.

Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting

Thank you, David. Operator, we can go to the questions queue now.

Operator, Operator

Thank you. Our first question is from Nik Modi with RBC. Your line is open. Please go ahead.

Nik Modi, Analyst

Thank you. Good morning, everyone.

David Maura, Chairman and Chief Executive Officer

Hi, Nik.

Nik Modi, Analyst

Hey, good morning. So, Dave, I was wondering if you usually have a pretty good handle on the big picture in the macro. So just wanted to get your state of the union on the shape of how you think things will evolve in 2024? I know there's a lot of moving pieces and it's very uncertain, but would just love your take today? And then just a little bit more granular, can you just give us any context on the discontinued products and how much that has impacted the business and how we should think about that at least through the first half of the year? And if I have it right, I do believe a retail customer exited the aquatics business during 2023. Do I have that right? And when will we lap that in 2024? Thanks.

David Maura, Chairman and Chief Executive Officer

I'll start by addressing the retail customer's exit from aquatics, which occurred more slowly than expected. They remained in the business longer than anticipated. Jeremy and Faisal can clarify if I've misstated anything. Regarding the discontinuation of several SKUs, we faced multiple operational challenges in 2023, and I wanted to enter 2024 in a strong position. Therefore, I urged all business units to clean up their operations. We targeted items that didn’t meet certain margin thresholds or inventory turn rates for exit. I believe we discontinued about 1,000 SKUs in the Pet category, which will have some spillover into the first quarter of this year. This decision was part of our effort to move past previous mistakes, especially since retail inventory levels were very high, which negatively affected us. We didn't want to carry any of that inventory into fiscal 2024. Over the past year, we made significant new hires in our working capital processes and have been focused on maintaining inventory that is fast-moving, profitable, and vital. We're committed to enhancing our inventory quality throughout 2024. On the macroeconomic front, while I am not an economist, I admit my previous predictions were incorrect. I anticipated that the Federal Reserve’s actions would lead to a much slower economy by now, particularly with mortgage rates rising from around 2.5% to 3% up to 8% as we transitioned into the fall in the U.S. Surprisingly, consumer resilience has been strong, and our businesses are performing well in Europe too. However, I believe we might see a slowdown soon. Personally, I think fewer Americans will be traveling for vacations in the summer of 2024 compared to 2023, which might decrease travel spending and potentially benefit us. Our company has a tradition of delivering excellent products at great value, and we're focusing on reinvesting in productivity to reduce unit costs. As we approach spring and the next year, we aim to position ourselves as the clear value option for consumers. My expectation is that people will be spending more time at home in 2024 than they did in 2023, which could work to our advantage. That said, I do perceive a weakening consumer market and believe it is wise to prepare for a potential worsening over the next 12 months.

Jeremy Smeltser, Chief Financial Officer

Yes. And I'd just add, Nik, to get granular on the modeling question, consistent with Q3, GPC SKU rationalization is around a $10 million per quarter hit to the top line in Q4 and should continue in the first half of '24 at about that level, and then it will wind down. And HPC probably in Q1 and Q2 will also see a similar headwind.

Nik Modi, Analyst

Excellent, thank you so much, guys.

Jeremy Smeltser, Chief Financial Officer

Yes, thank you.

David Maura, Chairman and Chief Executive Officer

Thank you, Nik.

Operator, Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Bob Labick with CJS Securities. Your line is open. Please go ahead.

Bob Labick, Analyst

Good morning. Thanks for taking our questions.

Jeremy Smeltser, Chief Financial Officer

Good morning, Bob.

Bob Labick, Analyst

So I wanted to start, obviously, you got through a difficult fiscal '23 as you described in this year, fiscal '24 is poised to rebound investment in brands and people, et cetera. Can you give us a sense of how much was the investment in brands in fiscal '23? And what's the expected investment to be in fiscal '24? How do we view the difference in the increase in investment?

Jeremy Smeltser, Chief Financial Officer

Yes, I mean we're not going to give absolute dollars as it's kind of a rabbit hole; you go down by business and by brand. But I would tell you that depending on how the year turns out on the top line and from an external perspective, we will probably spend between $40 million and $50 million more on brand investments among advertising, marketing, R&D, and some incremental IT investments in those areas.

Bob Labick, Analyst

Okay. Great. And then so how do you determine the right amount to spend? Is fiscal '24 right? Or is fiscal '25 going to be higher? And what's the form of investment that is higher this year and the expected ROI on that?

David Maura, Chairman and Chief Executive Officer

Look, Bob, I want to highlight a few key points. It's been a short journey since we closed the deal and gained liquidity in June of this year. A year ago, our leverage was between six and six and a half times, and we were managing the business for cash. We made significant cuts to fixed costs. We've replaced the entire leadership team in two of the three remaining businesses with brand-new leaders. We've just hired a new salesperson in Home & Garden and brought on a new marketing professional there. I've appointed a North American lead for the appliance business and a new president has taken over from Europe. This business had limited access to capital due to our leverage situation and the DOJ's challenge to the sale of HHI. Now, we have $1.8 billion in cash, and we anticipate a decline in the markets, but we want to take an offensive approach. We believe the best strategy is to invest in people, talent, and brands, aiming to introduce excellent products to consumers and establish a sustainable and growable earnings base for the future. We are significantly increasing our marketing budget and investing in e-commerce. We are actively testing and learning with our online partners like Chewy, Amazon, Walmart.com, among others. Our goal is to elevate the business to a healthier state and build from there as we improve. I anticipate we will recover in 2024, aiming to accelerate growth in 2025 with our current investments.

Bob Labick, Analyst

Okay, super. I'll jump back in. Thank you.

Jeremy Smeltser, Chief Financial Officer

Thanks, Bob.

Operator, Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Brian McNamara with Canaccord Genuity. Your line is open. Please go ahead.

Brian McNamara, Analyst

Good morning, guys. Thanks for taking our questions. My first question is regarding the HPC business. There’s a large player in the space that recently went public and appears to be the exception of the rule in terms of growing the top line in this tough market. With your outlook for increased pressure in 2024, particularly in kitchen appliances, I guess, what is this competitor doing differently that the rest of the industry appears to be struggling with?

David Maura, Chairman and Chief Executive Officer

Yes. That particular entity has been very successful in innovating and investing large amounts in advertising, sometimes reaching hundreds of millions of dollars. We clearly don’t have that level of scale. However, that concept is what we aim to achieve with our DRTV and DTC initiatives through the studio we acquired from TriStar. We’re focusing on making fewer, more impactful bets, which is also part of our new Remington launch we just executed in New York City on Monday. It’s about obtaining product insights from consumers, testing the product, refining our pitches, and then investing significantly in those efforts. This strategy has proven effective for them, and we intend to apply a similar approach where we believe it can benefit us.

Brian McNamara, Analyst

Great. That's helpful. And then secondly, what are your capital allocation priorities this year, particularly share buybacks as you move towards your target net leverage ratio of 2x to 2.5x?

David Maura, Chairman and Chief Executive Officer

Yes. We're in the middle of completing a $500 million repurchase program now, and that will wrap up soon. And we're going to get off this call and see where the world is next week. But I think if we can continue to shrink our float and grow our earnings, good things tend to happen if you can do that consistently. We've obviously got some bonds outstanding, and there's an obligation there. June, July next year, if we don't do an acquisition. But I think we really want to invest in our organic businesses. And never say never. If there's some tuck-in out there that is a slam dunk for Pet and Home & Garden, we'd probably look at it. But right now, I just want to continue to buy in shares that I think are undervalued and get our earnings stream growing.

Brian McNamara, Analyst

Great. Thanks a lot. Best of luck, guys.

David Maura, Chairman and Chief Executive Officer

Thank you.

Operator, Operator

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Chris Carey with Wells Fargo Securities. Your line is open. Please go ahead.

Chris Carey, Analyst

Hi, everyone, thank you for the question. Can I start with Garden? The outlook for retailers to build inventories later in the season, after facing pressure in the first quarter and continuing into the second quarter, is that based on conversations you've had with the retailers at this point in the year? Is there a lot of visibility regarding that comment, or is this a cautious approach given the developments in the category this year, the uncertainty about the weather, and similar factors? I'm trying to find a balance between the two.

Jeremy Smeltser, Chief Financial Officer

Yes. I think it's a little bit of both, Chris. I think, obviously, we're coming off of two tough seasons, particularly this last year, where I think our retailer customers behaved differently than we expected. So I do think our connectivity and understanding of their strategies is much better than it was a year ago. I think their strategies have stabilized. I think their strategy changed a lot as the year progressed last year. So it's a bit of knowledge from them. They understand that we have limited manufacturing for a business that's so seasonal. They have to be very communicative to us to ensure that they have the product when the consumer arrives, making it a really tight partnership. But I also think it does make sense to start the year conservatively, given the past couple of years. That said, we're really encouraged by Q4, where a stronger POS than both we and the retailers expected, because of a strong season continuing into the end and those lower inventory levels that they have now. We immediately saw replenishment orders and really outperformed where we thought we would be in Q4, so I think that's a good sign that our strategy is right as we head into 2024.

Chris Carey, Analyst

It's just given two years of organic sales growth decline, one would think inventories are much cleaner by this point, and specifically, a POS was better, so is this excess inventory going into next year or retailers managing a tighter inventory load than what they've typically done?

Jeremy Smeltser, Chief Financial Officer

Yes, I think that is a possible outcome. It could be much better if we have a strong season. However, I believe it’s wise to approach the start of the year with caution, acknowledging that business dynamics have shifted over the last couple of years. We need to be careful with our forecasts, as David mentioned earlier, ensuring that we provide numbers we are confident we can meet and that will satisfy our shareholders. I believe this is the appropriate approach as we begin fiscal '24.

Chris Carey, Analyst

Okay, that makes sense. Just one last one, then I'll hop back in. The outlook for sales this year, can you just maybe give some context on your expectations for pricing, relative volume? I would imagine volume down, but given you don't disclose that line item? Maybe any additional context there would be helpful.

Jeremy Smeltser, Chief Financial Officer

Yes. I think as you look at pricing for '24 kind of across the businesses and regions, I actually think that we're going to be relatively flat. I think there's going to be some areas where the competitive situation will require us to lower price. And I think there's going to be some strategic areas in revenue growth management where we can take a little bit of price. But net-net, I think it's going to be a neutral year. So we're really looking predominantly at volume for the low single-digit sales decline that we're forecasting, and again, predominantly coming from the HPC business.

Chris Carey, Analyst

Okay, thank you both.

Jeremy Smeltser, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Peter Grom with UBS. Your line is open. Please go ahead.

Peter Grom, Analyst

Thanks, operator, and good morning, everyone. So maybe just to start, David, and Jeremy, how would you characterize the degree of conservatism intended in the outlook? And then Jeremy, just a lot of commentary to suggest that despite confidence in the full year, it's going to be a tough first half, retail ordering patterns in GPC, weak start in HPC, can you maybe put a finer point in terms of how we should think about the phasing from an EBITDA perspective? And I guess just building on that, what drives the confidence that the second half will show improvement following what seems to be a pretty tough first half year? Thanks.

Jeremy Smeltser, Chief Financial Officer

Yes. I mean, I think first, we start with assessing our markets in Q4, the quarter we just came off of. What are we hearing from consumers? What are we hearing from our retail customers? I think essentially, we have baked that environment into what we think for '24, probably with an additional level of conservatism based on an expectation that we have. As David said earlier, economic conditions globally, but particularly in the U.S., will likely get a little bit worse than they've been in the last couple of quarters in fiscal '24. So we account for all those things in our forecast. I think our comments around the first half are very specific to situational issues, not necessarily macro issues in our specific categories and businesses. We want to point out that will impact how the first half plays versus the second half. But as you look to this year, we don't have some step-function change quarter-to-quarter in expectations for consumer demand and/or margins. We expect it to be more steady than what we've experienced the last couple of years. We don't have the significant roller coaster ride of inflation going up and deflation coming down to worry about. So I think it's a year of stability, as David talked about earlier, a year to start investing back into the brands in a material way sequentially from what we've done in the last two years, which has been quite low. A great year to deliver EBITDA growth in all three businesses.

Peter Grom, Analyst

Thanks so much. I'll pass it on.

Jeremy Smeltser, Chief Financial Officer

Thanks, Peter.

Operator, Operator

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open. Please go ahead.

Ian Zaffino, Analyst

Hi, thank you very much.

David Maura, Chairman and Chief Executive Officer

Hi, Ian.

Ian Zaffino, Analyst

How are you guys?

David Maura, Chairman and Chief Executive Officer

Ian, I'm good. How are you doing? Happy Friday.

Ian Zaffino, Analyst

Yes. You too, you too. I wanted to ask you on HPC. How are you thinking about a potential separation of that business? I know you had talked about it in the past; obviously, the circumstances have changed a little bit there. What do you need to maybe get a separation back on track? And then just as far as fundamentals, any M&A in that area as well? Because I know you talked a bit about M&A, but you didn't mention HPC, so I wanted to kind of see how you're squaring that? Thanks.

David Maura, Chairman and Chief Executive Officer

Yes. Look, we continue to want to develop a separate appliance business. But right now, we're trying to get it back to health. I think we're making some improvements there. We just had a 600 basis point expansion in profitability in the back half versus the first half. We have a lot of work to do. We just relaunched Remington globally. We have some new talent in that business that I'm optimistic about. While I think competition remains fierce, I expect that there will be some rationalization too. We've seen a bankruptcy in the space. I think retailers are going to want what we're preparing to provide them, which is fewer, bigger, better innovations. We typically have brands that have good value price points as I think people will be tighter with their spending on durable goods; they'll likely look for value price point products. If we can assemble a couple of quarters of better operating momentum, I think that will improve our odds of accomplishing our goals. I've been open about my view that I favor a combination. It’s synergistic and brings scale, allowing us to capture additional upside. We’ve been down that road in the past, however, unsuccessfully. We need to get the business in a better financial state and build real earnings growth and operating momentum, and then the opportunities available to us should improve.

Ian Zaffino, Analyst

Okay. And then I don't mean to put you on the spot here. But when you think about earnings potential of that business, I think you threw out something along the lines of like $120 million or something to that effect. Is that how you still feel about that business? Has anything changed there? Just kind of given the environment, what you've seen recently?

David Maura, Chairman and Chief Executive Officer

Yes, look, let me hit that head on. Look, you guys put me on the spot at all. Our Pet business is running over $200 million in EBITDA now, right? You saw a $53 print in the quarter. Home & Garden had a very good quarter. We just reported. However, we haven't seen a great Home & Garden selling season going on for the last two years, so we don’t want to overestimate that. Let's see how March and April turn out. One of the earlier questions here, we had a big retailer allocate a lot of space to electronic battery-operated landscape equipment. I'm not sure that went well, but maybe we’ll reclaim some space there. Let’s see how it all plays out there, but I think we can rebuild the earnings power of Home & Garden. Regarding your specific question about appliances, look, we've got a $1.2 billion business, and this business used to operate at high single-digit, low double-digit EBITDA margins. I just believe we're seeing so much distortion in that industry because of a giant demand caused by COVID. Retailers couldn't access enough product from us or anyone else, so they bought from anybody. A lot of fly-by-night companies popped up selling product cheaply from China with little to no margins and tons of recalls, damaging the economics significantly. However, as that rationalizes and companies go bankrupt and consolidation occurs, retailers will want what we are prepared to provide them: fewer, bigger, and better innovations. Good value pricing will be increasingly important as consumers watch their spending on durable goods. If we can have a couple of good quarters of operating momentum and improve margin structure, I believe there's a pathway to get where you mentioned. Not in '24, but we can lay a foundation for it in '24 and potentially achieve it in '25 and '26.

Ian Zaffino, Analyst

All right, great. Thank you very much.

Jeremy Smeltser, Chief Financial Officer

Thanks, Ian.

Operator, Operator

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Olivia Tong with Raymond James. Your line is open, please go ahead.

Olivia Tong, Analyst

Great, thank you. First question is just in terms of marketing spend and whether you could talk about short- and long-term goals. Obviously, the capacity has been more nowadays. If you intend to be above the category to gain some lost ground a little quicker? Or is sort of more in line and build? Just want to understand your thought process on reinvesting back in the business first and foremost. Thank you.

Jeremy Smeltser, Chief Financial Officer

Yes. I mean, obviously, we've spent under the average category for where we play over the past few years. I think the strategy is a little bit different by business and even within the business sometimes by brand. We have some premium brands in our global pet care business that play at the high end of the price points in their respective subcategories. But that's the type of business where you're not doing the traditional advertising that costs as much as what you do in some other CPG categories. So the spend is relatively modest but has led us to successfully grow at or above category for a number of years. When you look at the Home & Garden business, the scenario is a bit different. We have a value proposition play as part of our brand strategy. So while we want to invest more than we did in '22 and '23, and we intend to, we've already started, we don't need to be at 3% or 4% of sales. In fact, I think even coming out of our business units, they would tell you that targeting 1.5% to 2% of sales is sufficient and blended for what we seek to achieve brand by brand within our businesses.

Olivia Tong, Analyst

Got it. And then just in terms of thinking about profitability by division, if you compare this year's EBITDA margin to pre-COVID levels by segment. We're still quite a bit below, particularly on HPC and Home & Garden. But Pet's actually not that different. So as you think about rebuilding that EBITDA, can you talk about the divisions where you see greater progression early on versus those that will take a little bit longer to neutralize?

Jeremy Smeltser, Chief Financial Officer

Sure. Yes, I mean I think David just hit it in the last question on HPC, right? Where we've seen down to this lower single-digit level, and we'd like to get back into the high single-digit, low double-digit levels over the coming couple of years. I think you're spot on regarding Global Pet Care, Olivia; I think that's really directionally the right level, and the key focus is on actually growing the top line, dropping it down to the bottom line, and continuing to invest in the brands and new products. In Home & Garden, honestly, structurally, I don't think there's anything different inside our business other than the fact that we've absorbed the inflation like everybody else and have to price for it. The last two years, overall production and sales to our retail customers have been lower than we think a normal season will be, and that should naturally begin to leverage back up. Q4 serves as a good example of that. As I remarked earlier, Q4's results exceeded expectations due to late favorable weather for our categories: both our net sales and margins significantly outperformed expectations in the quarter. We want to see more of that as we move towards a more normalized season whenever that may be.

Olivia Tong, Analyst

Got it. And then just last question around uses of cash and share repurchase. Obviously, nice to see the move there. But as we think about continuing to deploy the cash, why shouldn't we expect you to continue to buy back shares if presumably right now, you're still looking to put cash to work, your focus right now certainly seems to be more internally than looking to add assets, so just if you could talk a little bit about share repurchase and thoughts about cash allocation, that would be great.

David Maura, Chairman and Chief Executive Officer

Yes. Look, I think we did a study. We returned about $3 billion of cash to shareholders in the last five years. We've just returned $500 million and are almost wrapping that up; we have a dividend out there. We've returned significant cash to shareholders this calendar year, and we continue to think we're materially undervalued. You can probably expect us to continue to buy shares, but we need to complete the current $500 million ASR, and we'll update you when that is done.

Olivia Tong, Analyst

Got it. Thank you.

David Maura, Chairman and Chief Executive Officer

Thanks, Olivia.

Operator, Operator

Thank you. And this does conclude today's question-and-answer session. I would like to turn the conference back over to Faisal Qadir for any further remarks.

Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting

Thank you. With that, we have reached the top of the hour, so we will conclude our conference call. Thank you to David and Jeremy. And on behalf of Spectrum Brands, thank you all for your participation.

Operator, Operator

This concludes today's conference call. Thank you for participating.