David A. Prichard - Spectrum Brands Holdings, Inc. Andreas Rouvé - Spectrum Brands Holdings, Inc. Douglas L. Martin - Spectrum Brands Holdings, Inc..

Faiza Alwy - Deutsche Bank Securities, Inc. Robert Labick - CJS Securities, Inc. Krystyna Metcalf - Raymond James & Associates, Inc. Sam Reid - Wells Fargo Securities LLC Christopher M. Carey - Bank of America Merrill Lynch Majid Khan - Tourbillon Capital Partners LP Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc. Karru Martinson - Jefferies LLC.

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2017 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, November 16. Thank you. I would now like to introduce Mr. David Prichard, Vice President of Investor Relations for Spectrum Brands. Mr. Prichard, you may begin your conference..

Thank you, operator. Good morning, and welcome to Spectrum Brands Holdings fiscal 2017 fourth quarter earnings conference call and webcast. I'm Dave Prichard, Vice President of Investor Relations for Spectrum Brands, and I'll be your moderator for our call today.

Now, to help you follow along with our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at spectrumbrands.com. This document will remain there following our call.

Now if we start with slide 2 of the presentation, you'll note that our call will be led by Andreas Rouvé, our Chief Executive Officer; and Doug Martin, our Chief Financial Officer. Andreas and Doug will deliver opening remarks, and then they will conduct the Q&A session. Now, let's turn to slide 3 and also slide 4.

Our comments today include forward-looking statements, including our outlook for fiscal 2018 and beyond. These statements are based upon management's current expectations, projections and assumptions and are, by nature, uncertain. Actual results may differ materially.

Now, due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated November 16, 2017, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10-K. We assume no obligation to update any forward-looking statement.

Also, please note that we will discuss certain non-GAAP financial measures in this call. The 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.

With that, I'm very pleased now to turn the call over to our Chief Executive Officer, Andreas Rouvé..

Thanks, Dave, and thank you all for joining us. Turning to slide 6, we finished a challenging fiscal 2017 with a solid fourth quarter performance. Net of acquisitions and the favorable currency impact, we grew organic net sales in Q4 by 3.1%.

If we consider our decision to exit low margin, non-strategic business, then the adjusted organic sales growth of our core business was even 4.2%. Accordingly, we increased our organic adjusted EBITDA by 5% and our adjusted EBITDA margin expanded 50 basis points to 19.5%.

Our Home & Garden and Hardware & Home Improvement categories led the way with record quarterly results. Also Global Auto Care and Personal Care delivered a solid performance, and I'm pleased to report that our e-commerce business remains a bright spot with growth of over 50% in our core U.S. market.

Regionally, our growth was broad-based and driven by North America, Europe and Asia Pacific. Sales were up also in Latin America, if we exclude the exit of non-strategic business. Let me add here that the integration of our PetMatrix and GloFish acquisitions from Q3 are proceeding well and both are delivering ahead of our expectations.

Fiscal 2017 was our eighth consecutive year of record adjusted EBITDA, adjusted EBITDA margin and adjusted free cash flow, which grew 10%, in large part from excellent working capital improvement. Our reported EBITDA margin increased by 20 basis points to 19.1%, which was also a record annual level. In 2017, major U.S.

retailers had adjusted their inventory levels, especially in our seasonal categories. While we expect retailers to continue their focus on lower inventory levels also in the future, we believe that the inventory levels are now much healthier than a year ago.

In addition, the two-year up and down impact of the Zika virus on our repellents business in our Home & Garden division has now been completed.

Also, the adverse impact of exiting low-margin, non-strategic business which reduced our top line in 2017 by approximately $42 million, or 0.8%, will lessen in 2018 to approximately $25 million, which is related to the exit of a dog and cat food customer tolling agreement in Europe.

At the same time, we have increased the pace of new product development and are bringing more innovation to the market and are moving into more channels, categories and countries around the world, such as our launch of major brands through China's leading e-commerce retailer, JD.com, and the U.S.

launch last month of the leading British Russell Hobbs brand of kitchen appliances. Also in batteries, we are stepping up our investment to enable further international growth with the expansion of our alkaline battery plant in Germany and our hearing aid battery plant in the UK.

We are also making good progress in our two transformational projects in the U.S. The consolidation of our Global Auto Care manufacturing and distribution in Dayton, Ohio is now complete, and the consolidation of our Hardware & Home Improvement distribution in Kansas is currently 65% complete and we expect to complete this project in March 2018.

Both projects streamline our supply chain and will allow us to reduce our inventory levels and improve our service levels. Finally, our voluntary U.S. Pet rawhide recall in June continued to have an operating cost and sales impact in Q4.

We have corrected the production issue, have restarted the three South American plants and continued to restock retailers in the U.S. and Canada. However, we will still have some impact at the beginning of this fiscal year.

Turning to slide 7, looking forward, we are optimistic about delivering organic net sales and adjusted EBITDA growth in fiscal 2018. As many of you have seen, we also guided this morning to another year of record adjusted free cash flow with an increase of as much as 9%.

This growth is driven by our focus to have Spectrum Brands present with our superior quality and superior value products wherever and however the consumer chooses to shop. This is why we place such an emphasis on strengthening our retailer relations around the world.

This also implies the need to accelerate product innovation, selectively increase marketing, and add more digital resources to better educate today's mobile consumer on the superior value proposition of our broad portfolio of everyday nondiscretionary products.

Therefore, we are launching two important and complementary initiatives, Project Alpha and Project Ignite, which are designed to accelerate our multi-year growth ambitions.

In the case of Project Alpha, we plan to spend up to an additional $20 million this year to expand into adjacent market segments through selective investment in new product development and strong market launches using new digital and social media marketing campaigns.

This will help us to leverage our strong brand and retailer relations to launch innovation with key brands such as Armor All, Russell Hobbs and Nature's Miracle.

Project Ignite is an initiative to ensure that our organization adapts to rapidly changing consumer preferences and retail channels, and that resources are allocated to our best growth opportunities.

Both of these projects are expected to be multi-year in duration, and we expect Project Ignite to partly fund the increased investments made through Project Alpha in fiscal 2018. Let me turn it over now to Doug for the financial review and details on our performance by product category..

Thanks, Andreas, and good morning, everyone. Turning to slide 9, let's review Q4 results beginning with net sales. Fourth quarter reported net sales of $1.32 billion increased 5.8% versus last year.

Excluding the favorable impact of $12.4 million of foreign currency and acquisition sales of $20.8 million, organic net sales grew 3.1%, our best quarterly result in 2017. This increase included the negative impacts of planned unprofitable business exits of approximately $14 million, or 1.1%.

HHI and Home & Garden delivered record fourth quarter performances, along with strong performances from Global Auto Care and Personal Care.

Reported gross margin of 37.5% decreased 140 basis points from 38.9% last year, primarily due to unfavorable mix, the negative impact of the rawhide recall and operating startup inefficiencies primarily in Edgerton, Kansas.

Reported SG&A expense of $322.1 million, or 24.4% of revenue, compared to $294.4 million last year, or 23.6%, primarily due to acquisitions, higher share-based compensation expense and increased marketing investments to support new product launches.

Reported operating margin of 8.2% decreased 450 basis points versus 12.7% in the prior year, largely driven by increased marketing investment, restructuring charges and impairments.

On a reported basis, Q4 diluted earnings per share of $1.63 increased compared to $1.49 last year, primarily due to reduced interest expense, a larger income tax benefit and lower average shares outstanding. Adjusted EPS of $1.35 improved 3.1% versus $1.31 last year.

Q4 reported a tax benefit of 77.7%, which has improved from an 8.4% benefit last year, primarily due to a discrete tax benefit recorded in the quarter to reverse a previously recorded tax liability for the anticipated repatriation of non-U.S. earnings.

Turning to slide 10, reported interest expense in fiscal 2017 of $211 million decreased $39 million from $250 million last year, driven by the benefits of our 4% euro-denominated notes and repricing of our U.S. term loans in October and April of this year, partially offset by interest related to acquisitions and share repurchases.

Cash interest payments of $183 million were $55 million lower than last year. The full-year tax rate of 13.8% increased from 10.1% last year due to a non-recurring release of a U.S. valuation allowance in 2016, net of the impact of the current year benefit described previously. Cash taxes of $37.5 million were comparable to $35 million in 2016.

Depreciation, amortization, and share-based compensation were $256 million compared to $247 million last year. Cash payments for acquisition and integration and restructuring and related charges for 2017 were $44.3 million and $22.3 million, respectively. Now to our operating unit results, beginning with slide 11 and Global Auto Care.

Global Auto Care ended fiscal 2017 with a good Q4. Reported net sales of $102.6 million increased 1.9% against solid growth last year, driven by Europe and Asia Pacific, while U.S. revenues were essentially unchanged with higher U.S.

appearance products sales being offset by lower refrigerant revenues, primarily due to cooler weather conditions in the prior year and tighter auto retailer inventory levels. Adjusted EBITDA increased 3.5% with a margin improvement of 50 basis points, primarily driven by lower expenses.

In fiscal 2018, Global Auto Care will continue its focus on accelerating organic growth through increased cross-selling, share gains, and adjacency expansions in the U.S., improving its vitality rate with larger investments behind new product development and faster international growth.

GAC expects further benefits from the second year of its Armor All Ultra Shine Wash and Wax Wipes, which were successfully launched in 2017, with two more items being added to the line. And also, the introduction of a full line of Armor All automotive air fresheners.

Turning to slide 12, Hardware & Home Improvement rebounded from Q3, as expected, to post a strong Q4 reported net sales and adjusted EBITDA increases of 6.3% and 10.6%, resulting in an 80 basis point adjusted EBITDA margin expansion to 21.9%. This solid performance was driven by strong growth in residential security and plumbing in our core U.S.

business and, to a lesser degree, in Canada. The planned exit of unprofitable businesses in Mexico adversely impacted growth by 1.6% in the quarter. HHI has now fully lapped this exit, so it will not impact fiscal 2018. HHI's core U.S.

businesses in residential security, builder's hardware and plumbing are healthy and growing, supported by a multi-year new product roadmap, which is delivering steady innovation. Important homebuilder channel wins will also benefit HHI this year.

And exciting recent news also includes Amazon's announcement in late October that two Kwikset smart locks, our Kwikset Convert [Kevo Convert] and our Kwikset SmartCode, will be smart lock solutions for the new Amazon Key In-Home Kit, which allows prime members in 40 markets to receive in-home delivery and grant secure home access for guests using the Amazon Cloud Cam and our compatible smart lock, where we continue to be the innovation leader in the U.S.

residential smart lock market. Operationally, HHI continues to complete its U.S. distribution center consolidation into a single, new, larger facility in Kansas. The project began in April and has experienced some operating startup issues, cost inefficiencies, and higher than normal customer backlog.

But we've now closed the West Coast distribution center successfully, and the East Coast facility will wind down soon. This consolidation will result in a more streamlined footprint and lower inventories later in 2018 and beyond. Now, to Global Pet, which is slide 13.

Global Pet continues to be a business in transition with Q4 reported net sales of $217.2 million, increasing 5.1%, as a result of $20.8 million of revenue from the PetMatrix and GloFish acquisitions. Excluding acquisition revenues and favorable FX of $2.3 million, organic net sales decreased 6.1%.

Reported adjusted EBITDA increased 5.5% to $44 million due to the acquisitions, with a 10 basis point margin improvement, while organic adjusted EBITDA of $36.2 million declined 13.2%, excluding the acquisitions and positive FX of about $1 million. Organic sales declined in both Europe and the U.S.

The primary driver for lower European revenue was the significantly lower dog and cat food sales from the acceleration of the planned exit of a pet food customer tolling agreement, which totaled $6.4 million, and negatively impacted pet sales by 3.1%.

And in the U.S., as we mentioned in the last quarter, companion animal sales were adversely impacted by the rawhide dog chew product recall in June, as well as continued sluggish store traffic in certain channels.

In fiscal 2018, Pet top and bottom line results will be boosted by the full-year impact of PetMatrix and GloFish acquisitions whose integrations are going smoothly and ahead of schedule, and by delivering growth in our legacy businesses through new product launches, new customers, cross-selling and strong e-commerce growth.

The impact of the exit of the pet food customer tolling agreement for 2018 is expected to be about $25 million. Moving to Home & Garden, which is slide 14. Home & Garden also rebounded from Q3 to deliver a very strong double-digit performance in Q4.

Reported net sales and adjusted EBITDA increased 26% and 62%, respectively, resulting in a 590 basis point margin improvement to 27%. All categories posted solid growth, driven by favorable POS, coupled with increased replenishment orders triggered by generally lower retailer inventory levels and a modest positive benefit from the Q4 hurricanes.

While fiscal 2017 could be described as a reset year with more quarterly volatility than normal, Home & Garden nevertheless achieved record POS, record household control brand sales and market share gains.

Home & Garden plans measured above-category growth in fiscal 2018, with quarterly phasing reverting to more traditional historic pacing based upon more normal spring and summer weather pattern expectations. Growth will be driven by innovation in spraying and annualization of 2017 innovation. Now to Personal Care, which is slide 15.

Personal Care reported a strong Q4 with growth in nearly every region. Reported net sales of $127.3 million increased 5.6%, while organic revenues climbed 3.9%, excluding favorable FX of $2 million. The improvement was led by solid growth in the U.S. and Asia-Pacific and moderate growth in Europe and Latin America.

A bright spot in the quarter was strong double-digit growth in e-commerce sales where these businesses have already built significant channel presence. Reported and organic adjusted EBITDA increased double digits with a reported margin improvement of 130 basis points.

The increase was driven by higher volumes, favorable mix and continuous improvement savings. Looking to fiscal 2018, Remington will continue a steady launch of impactful products in shave, groom and hair care, supported by targeted marketing investments to drive volume growth and even greater awareness of the global Remington brand.

Now let's turn to small appliances on slide 16. Q4 reported net sales of $171.5 million decreased 2.9%. Excluding favorable FX of $1.1 million, organic revenues fell by 3.6%. Higher sales in Europe and Latin America, primarily from new product launches and new listings, were more than offset by lower U.S.

and Canadian revenues as a result of sluggish POS, increased competitor promotions and retailer adjustments. Reported and organic adjusted EBITDA fell high single-digits, with a reported margin decline of 70 basis points due to unfavorable mix, reduced volumes and unfavorable FX.

Small appliances will continue its strategy in fiscal 2018 to broaden its product portfolio and distribution points around the world, with a focus on white space opportunities and continued e-commerce growth where the business has a significant percentage of its revenues today. As some of you've seen, the most prominent and recent exciting U.S.

launch is our exciting Russell Hobbs brand in the U.S., which is a stylish, top-quality family of products that we launched in e-comm within the last few months. Finally, to Global Batteries, which is slide 17. Q4 reported net sales of $235.1 million increased 5.6%, driven by strong growth in Europe, Latin America and Asia-Pacific. U.S.

revenues were essentially unchanged, including a modest positive benefit from the hurricanes and continued strong performance from Fusion, our highest-performing alkaline battery. Excluding a $4.5 million favorable FX benefit, organic sales improved 3.5%.

Adjusted EBITDA and margin fell as pricing pressure and commodity cost increases more than offset higher volumes, cost savings and positive FX. Led by the alkaline and hearing aid categories, Global Batteries will pursue growth in 2018 in under-indexed channels and countries and through distribution gains.

Rayovac is also launching its next-generation Active Core Technology product that gives consumers longer-lasting, high-quality hearing aid battery performance with an improved design, delivering higher voltage for high-tech device applications.

Moving to the balance sheet on slide 18, we ended fiscal 2017 in a strong liquidity position with more than $680 million available on our $700 million cash flow revolver, a cash balance of $168 million and debt outstanding of $3.9 billion.

We generated record adjusted free cash flow in fiscal 2017 of $587 million, which was within our guidance range, primarily as a result of strong working capital management and surpassing 2016 free cash flow of $535 million and 2015 free cash flow of $454 million.

Total leverage was approximately 4.1 times at the end of fiscal 2017, slightly higher than the 3.9 times at the end of 2016, primarily as a result of acquisitions and share repurchases. Capital expenditures were $115 million compared to $95 million in the prior year.

And in fiscal 2017, we repurchased over 2 million shares of common stock for $253 million or about $122 a share. And in the fourth quarter, we repurchased over 700,000 shares of stock for $87 million or just under $119 million (sic) [$119] a share.

Clearly, we still have a lot of confidence in the value of our stock and are continuing to support it in an aggressive way.

Turning to slide 19 and our 2018 guidance, we expect reported net sales to grow above category rates for most categories, including the anticipated positive impacts from FX of approximately 160 to 180 basis points based on current rates. We expect to deliver record adjusted free cash flow of between $620 million and $640 million.

Full-year interest expense is expected to be between $210 million and $220 million, including approximately $15 million of non-cash items. And cash interest payments in the year are expected to be between $185 million and $195 million.

Depreciation and amortization is expected to be between $245 million and $255 million for 2018, including approximately $50 million for amortization of stock-based compensation. Our 2018 effective tax rate is expected to be between 30% and 35%, and recall that for adjusted earnings we use a 35% tax rate.

Cash taxes are expected to be between approximately $55 million and $65 million and we do not anticipate being a significant U.S. federal cash taxpayer during 2018, as we continue to use net operating loss carry-forwards.

Cash payments for acquisition and integration and restructuring and related charges are expected to be between $40 million and $60 million, and capital expenditures are expected to be between $110 million and $120 million. Thank you. And now back to Dave for Q&A..

Thank you, Andreas and Doug. Operator, with that you may now begin the Q&A session please..

Your first question comes from Faiza Alwy with Deutsche Bank. Your line is open..

Yes. Hi. Thank you..

Good morning..

Good morning. So I guess my first question is just on the categories.

What are you anticipating the categories are going to grow in fiscal 2018 and perhaps what did they grow in fiscal 2017?.

Yeah. Let me first start with the question on the category growth. I think overall, we expect all categories to grow somewhere in the low single-digits, with probably the strongest growth in the Hardware & Home Improvement where we have the strong tailwind from the U.S. housing market.

We also expect some benefits here – long-term benefits coming from the hurricanes, so therefore that is probably the category growing fastest.

Now on the other extreme, it's probably going to be on the section of home appliances where again the growth is quite often driven by innovation, which leads to a peak in market demand, and then that slows down. And then right now, for instance, the home appliance category is slightly shrinking.

We estimate it, based on market data, shrinking by about 0.5%. And the other categories are somewhere in between. Now, if you look at 2017, I would say that was overall very similar. So, there was really no dramatic shift.

The only really difference is that in the Global Auto Care where we have the AC business, which is a very strong, weather-dependent business, there we saw this year a decline in the category of about 5%, but this was really purely driven by cooler summer weather in our core U.S. market. And again, we believe that's not a long-term indication.

It's just a short-term weather impact.

Similarly, we had in our Home & Garden division, our personal repellent business where, again, as I mentioned earlier, we had in 2016 the exceptional strong demand coming from the Zika virus, whereas now in 2017, both retailers but also consumers had pretty much their household equipped with personal repellents, so the category was also down.

But again, we believe this was a kind of two-year up and down. So, overall, we believe that also those categories will continue to grow in the low single-digit rates..

Okay. And then if I may just ask a second question regarding your two new projects, Alpha and Ignite, if you could maybe give us just a little bit more detail on what the $20 million will be spent on, how these projects will be managed.

How do you determine the ROI on these projects? Sort of just what adjacent market segments are you targeting? Just any more detail that you can provide on those two will be really helpful..

Yes. Very good. The background is really that Spectrum Brands, as you know, based in 2009, we recovered from bankruptcy, and we still had a little bit, as part of our corporate culture, a relatively short-term thinking. That means we pursued projects which had more or less a self-funding principle.

That means we invested not more than what we were expecting as a payback, so that the year one impact was neutral to positive. However, what we are doing now is we are investing more into innovation to expand into adjacencies, and when we then launch such innovation, we are going to invest more into the marketing to drive growth in those categories.

To a certain extent, our step with the Wash and Wax Wipes in Armor All is a good example. This is, in 2017, net, if we consider our marketing investment, a loss. However, we have established the brand. We have gained strong retail distribution, it is aware in the consumer mind and now we can continue to earn the fruit in 2018 and beyond.

And a similar approach we are going to drive now in other categories and examples would be, for instance, here in the U.S., we are relatively strong in home appliances with the BLACK+DECKER brand more, let me say, in mid price point, lower price point.

And there, we are going to leverage our innovative higher-priced products from Europe under the Russell Hobbs brand, we are going to enter it but, of course, we will have to invest into the respective marketing means to drive it. Now you asked about the return on investment. It is still a very compelling return.

Payback is typically in the range of one and a half years. So therefore, this is not going to be a long-term drag. It's the kind of start-up investment to get it going, and then we are going to reap the benefits in the future..

Okay. Great.

And just quickly, Doug, like is this $20 million excluded or included in your free cash flow guidance?.

It's included in the free cash flow guidance..

Great. Thank you..

Thank you..

Your next question comes from Bob Labick with CJS Securities. Your line is open..

Good morning..

Hi, Bob..

Good morning..

Hi. Just wanted to talk a little bit about the shifting retail landscape, and can you talk about how your go-to-market strategy has evolved? And please talk also about your online strategy. You mentioned the 50% growth online, which is fantastic.

Maybe talk a little about where you are now in terms of online sales and where you expect to be in three years..

Okay, that's a complex question. I think the first point is online or, let me say, multichannel, because it's also a combination where you order online, you pick up in store, and all those kind of options. It is one of many channels. And if you look at the total market, well, we are still somewhere in the 25% and less of the respective market channel.

So therefore it is an important, very rapidly growing channel which we are fully exploiting. However, we have to realize that the majority of the demand is still in other channels. And that can be the mass, that can be specialty, that can be discount channel, so there are a multitude of other channels.

And the key challenge really going forward is to avoid the channel conflict because, of course, the online is driving huge price transparency, and therefore the biggest challenge in our online growth is really minimizing channel conflict. Therefore having meaningful product differentiation features and those kind of specifics is going to be key.

Now, if we look at our growth strategy, of course, there are certain categories which are more prominent online and really the highest online share is in the Personal Care category, where it's in the high-20s already for us today, and we expect that to continue to grow.

And I can tell you openly that, for instance, in Europe, the biggest online retailer is also our biggest customer in Europe already. So, therefore we are developing here very well and very fast.

Other categories, it is less prominent, but also here, we are investing because online is not only the shopping, it is also increasingly an information search, a validation, a comparison of competitors. So, it's also kind of information-building process and that's why we are increasing our investment also into digital marketing..

And Bob, just to be a little more specific on what we currently sell online, as we can measure it anyway, because as Andreas said, it's multi-channel. So, sometimes we may sell online but a consumer converts at a brick-and-mortar location, and we don't necessarily have visibility to that.

But what we can measure, which is fairly direct e-commerce, would be about 6% across the entire portfolio..

Okay. Fantastic.

And then just following up on that, I mean, do you have any idea where you would want that to be in three to five years? Is it even knowable? What's the thought process to drive it higher and do you have a goal?.

Again, it depends very much on the category. Like for instance, I think Doug mentioned it earlier, as we are launching Russell Hobbs in the UK (sic) [U.S.], we are launching it exclusive online because, again, it's the easiest way to reach many consumers fast. You can highlight the features, the superior value proposition very fast.

But really, I would say it's difficult to now pick a number. So we want to continue to grow faster than the category. And again, if we assume, for instance, that the category grew online in the mid-20s, we grew about twice as fast as the category, and that continues to be our objective..

Okay. Super. Thanks.

And then if I can, just shifting gears completely, any update you can give us on the HRG situation, where that stands right now, and possible timing of any outcomes or resolutions?.

Unfortunately, we can't have too much details for you. The board, as we have communicated earlier, has formed a special committee where we have all our independent directors represented. And this special committee is representing the interest of all our shareholders, and they are in direct discussions with HRG.

And unfortunately, there are no more specifics which we can share today with you, but we will keep you updated as soon as something materializes..

Great. Thank you very much..

Your next question comes from Joe Altobello with Raymond James. Your line is open..

Hi. Good morning. This is Krystyna on for Joe. My first question is I believe you had an extra shipping day in the quarter versus the base period, and I was just wondering what the impact was on organic growth..

There would have been no material impact on that, certainly for the entire year, it all balanced out. So, I wouldn't call out a number on that for one day..

Okay.

Not even just for fiscal 4Q?.

No..

Okay. And then, can you give us an update on the pricing environment in the U.S.

consumer battery market?.

It's a tough question. I think there are two distinct trends. The one trend is that there is an upgrade to higher-quality, higher-featured and higher-priced products. So there is an upgrade in the market which is supporting the price.

However, in all fairness, we have to – or at least we are seeing it, that the retailers are increasingly leveraging their purchasing power. And therefore, you have also seen, in our case, that we had, in the quarter, a decline, especially in our U.S. market. So therefore, it's still a very profitable category. It is growing.

There are positive trends in the category, but it remains a very competitive market..

Okay, great. Thank you so much..

Your next question comes from Sam Reid, Wells Fargo. Your line is open..

Hey, guys. Thanks so much for taking the question and congrats on the quarter. I had a quick question on the Auto Care segment. I guess if you could talk to where you're seeing the tighter inventory levels that you mentioned.

Is it primarily on the specialty side or are you seeing it in mass as well? And then, I guess to sort of piggyback off of that question, how rationalized are retailer Auto Care inventories at this point in time? And do you think the pendulum could actually swing the other way and we actually see some restocking if weather trends are favorable this year?.

Well, I think the biggest impact we saw this year was really in our two seasonal categories in Home & Garden and Auto Care. And if you look at it, we had partly, in the past years, actually product returns coming at the end of the season.

So retailers had stocked more inventory during the peak season, but then also were pretty hard in returning it at the end of the season. So we have not seen that this year. And if you think, for instance, at the biggest retailer in the U.S., they have implemented, in parallel with this inventory reduction, a scheme which they call On-Time In-Full.

That means improving the cooperation with their suppliers where they get delivery in-time and in-full. And this again allows the retailer and the manufacturers to take total inventory levels out of the supply chain. So we believe that we are today at a much healthier level than we were last year.

But in all transparency, we believe that it will remain a core point. And again, coming back to this biggest retailer in the world, I think they are announcing it publicly that they will continue to focus on further inventory reduction, and I think we are well-positioned.

We don't see the big impacts coming in the future as we had seen it this year, but there will be some minor twists and tweaks in different categories..

Got you. No, that's super helpful. And I guess a slightly different question here, the builder channel, I know you guys have mentioned that as a growth opportunity.

Kind of when should we see some of the moves that you've made into that channel start to flow through in HHI in 2018?.

Well, that's actually beginning right now. So we had a nice win with a very large homebuilder in the latter part of this summer, and we loaded up their showrooms and are beginning to ship into that channel right now..

Got you. Thank you so much. I really appreciate it..

Thank you..

Your next question comes from Olivia Tong with Bank of America. Your line is open..

Hi, guys. This is actually Chris Carey on for Olivia..

Hi, Chris..

Chris..

Hey. How are you? So I guess a little bit of a change of language on the businesses that are growing above category growth to now most, not all.

So I guess can you provide some perspective on what that means for the total company and maybe how you think about Project Alpha contributing to the ability to get some of those categories where you don't expect – or the businesses where you don't expect them to grow in line with the category or above the category, how Project Alpha's going to help you do that?.

Yeah. Let me start in the beginning and then I'll turn it over to Andreas for Alpha. On the tone, Chris, we actually changed that earlier in 2017 to communicate that most of our categories will grow most quarters above category rate. That's what we're intending to communicate, which allows some volatility by category within the year.

That's all we're trying to do there. And we expect every one of our businesses to – and plan for every one of our businesses to grow faster than their categories every year..

Yeah. And again, I think, really, no dramatic change in our strategy with Project Alpha. Our core strategy to grow faster than the market is the more, more, more approach. That means expanding into more categories, expanding into more channels and expanding into more countries. And let me give you there some nice examples.

I mentioned earlier launching Russell Hobbs here in the U.S. to capture higher price points, different featured products. At the same time, we are expanding now with Home & Garden products into Latin America.

We are going to launch Auto Care in Brazil where we are a very strong leading brand with batteries, where we have a fantastic distribution footprint, strong retailer relations. So we are going to leverage that to launch Auto Care into Brazil.

And these are the kind of initiatives where we said, yes, we are going to launch into new channels, categories, countries and we are going to support it so that we are going to have a fast, impactful growth instead of slowly, marginally growing it in a self-funding way..

Okay. Understood. That makes sense. And then just one follow-up on gross margins. Can you disaggregate the impacts in Q4? I'm specifically trying to get a sense of mix given that the gross margin trend has trended down over the course of fiscal 2017 and just trying to get a sense of how to think about that going into fiscal 2018. Thank you..

Yeah.

Thank you, Chris, and I think some of the drivers in gross margin this year from a reported basis, which is what I'll speak to, include some of the start-up inefficiencies related to those major footprint decisions we made in Dayton, Ohio around Global Auto Care, which, as you'll recall, is five locations into one, between manufacturing and distribution sites , as well as moving in our R&D facility into a greenfield operation.

So you would have an expectation, and we did have an expectation, of some normal start-up inefficiencies there. And that's – had been a little bit of a drag on gross margin in the year.

And similarly in Kansas where we're moving two DCs into one, another greenfield operation and some consolidation and start-up inefficiencies in that location as well having an impact on gross margin this year. The pet recall is another major driver in gross margin.

And then across the company, beginning in the fourth quarter, we've begun to see some input cost pressures from commodities that we haven't seen for a couple years..

Okay. Thanks for that..

Your next question comes from Majid Khan with Tourbillion. Your line is open..

Hi, guys. Good morning..

Good morning..

Thank you for taking my question. First of all, congratulations on the quarter. It's nice to see the fundamentals have turned the corner and you expect that strength to continue into next year, especially given the very difficult macro backdrop for the sector.

I know you haven't commented on the potential HRG deal but I just wanted to highlight that with your free cash flow guide of $650 million-ish at the midpoint, ex the additional growth spend, the stock is trading almost at an 11% free cash flow yield, and it's, by far, the cheapest stock in the group and, by far, the cheapest the stock has been for many years.

And I think even Energizer's trading at an 8% free cash flow yield.

And as you're aware, we've communicated that we're obviously in favor of an accretive deal with HRG, but with your stock at these prices, and clearly there's an overhang from the lack of resolution of the HRG issue weighing on the shares, I think any Spectrum shareholder, at this point, would be supportive of tabling an HRG deal in favor of doing a buyback.

Between this quarter and the next four, you're going to generate over $1.1 billion of free cash flow and your entire float is only $2.3 billion.

And even if you repurchase stock at the prices you paid last quarter, almost 20% from where it was trading yesterday, you can retire over 40% of your float and exit, I think, fiscal 2018, earning almost $13 of free cash flow per share. And that's on your guided midpoint of the free cash flow guide and that's after retiring almost 9 million shares.

And obviously, you could always do a deal with HRG sometime in the future, and I'm just wondering if you've considered this alternative versus negotiating a deal with HRG while your stock is on its lows..

Majid, thank you. Yes, one point of clarity before we get in. The midpoint of our guidance next year is $630 million, not $650 million, so $620 million to $640 million's the range.

But you're right, we're very bullish on our ability to generate cash flow on a sustainable basis, high-quality cash flow as a company, and that is currently and has been a focus of ours for a long time.

And then beyond that, you can rest assure that the special committee continues to think about different alternatives and different options, and that's their role and they'll continue to do this. And as I mentioned in my prepared remarks, we continue to be very – believe our stock is undervalued, and we've continued to buy into it.

I understand what you're saying from a bigger perspective, but those are decisions for the board to make..

Fair enough. Thank you and congratulations again. Good job..

Thank you. Yeah. Thanks..

Your next question comes from Jim Chartier, Monness, Crespi, Hardt. Your line is open..

Good morning. Thanks for taking my question..

Hi..

Jim..

Hi, guys. First, I want to touch on the impact of the rawhide recall in fourth quarter. Doug, can you quantify what the impact was on fourth quarter sales? And then you mentioned that it would continue to be a drag in the first quarter, how much of an impact you expect it to be.

And then kind of net for 2018, does it become a positive swing factor for you this year?.

Well, the impact actually in the quarter was relatively limited, less than $5 million on top line. The point, of course, is we do see a recovery as we are now replenishing the retailer inventories. However, in all transparency, we did face a couple of challenges, especially in private label contracts, which we have been supplying.

So it will take some time to regain those contracts which were lost in the meantime. But overall, we have learned from this process, we have established best-in-class processes now and really, I think, it's going to be, long term, a clear competitive advantage..

Great.

And then next on the HHI supply chain disruption, have you guys fulfilled the backlog that you had at the end of last quarter, and if not, when do you expect that'll be fully worked through?.

We did make some progress on the backlog in the quarter. But interestingly enough, and positively, we had very strong order inflow during the quarter. So we didn't take the backlog down as much as we might have wanted to, but it wasn't because we weren't making progress in the facility, it was more because the order flow continued to be strong.

So that's good news for us, we think, going into 2018. We can continue to impact that backlog as we complete the transition..

Great. And then in terms of the margin improvement this year, up until 2017, you guys had some good EBITDA margin improvement.

So in light of kind of Project Alpha, do you expect your margin improvement to be a little bit depressed this year, and then does it kind of rebound in 2019 and beyond?.

I would say – we've historically said that our objective is to grow EBITDA margin 20 to 50 basis points a year, and we would stick with that. I would say that you should factor in the Alpha investments, though..

Great. Thanks and best of luck..

Thank you..

Your next question comes from Karru Martinson with Jefferies. Your line is open..

Good morning. Just on the front on the Alpha investments, you talked about Project Ignite possibly offsetting some of those.

I mean, how should we think about the magnitude of savings that you can kind of get from operational improvements?.

Yeah, we're not ready to lay those out yet at this point. This is early stages on the initiative. But I think you can think about it in the way we approach continuous improvement across the company, which has largely been focused on the cost of goods sold and supply chain parts of our P&L.

Project Ignite will take us above that in the gross to net customer rebate areas.

And it's really about – in the first instance anyway – and it's really about identifying the effectiveness and productivity of our spend and making sure that we're spending with customers that helps drive profitable growth for us and prioritizing where we spent; so against innovation is a really good place for us to put new dollars, it helps the entire brand portfolio while launching new products and, potentially, in new categories or new channels.

And then making sure that the investments that we make across SG&A are also aligned with those priorities for growth..

Okay. And when we look at Project Alpha, I think, historically, the mantra has always been, we offer you the same or better quality than our competitors at a much better price.

I mean as you go into line extensions and innovations, are you looking at kind of a new competitive landscape or is the goal still to kind of adhere to that core message?.

We prefer to talk about superior value. That means that the product performance, price ratio is superior compared to competition. And that can apply to lower priced products, but that can also apply to premium higher-priced products.

And that is a slight shift and that's really supported by Alpha, especially if you launch innovative new products, if you enter new categories, you have to educate the consumer. You have to tell the consumer that you're doing this offering, that you are an option available.

And that's really, I would say, the biggest change that we are going to invest more to support those market launches in a more aggressive way, using digital, social media to really reach our target consumer and convince them about our superior value proposition..

And when you guys think about the robust cash flow that you have, I mean, what are your thoughts in terms of growing these innovations organically versus going out and acquiring perhaps some smaller start-ups who might have some additions that you want to put into the portfolio?.

As you have seen with the acquisition of PetMatrix, GloFish, we remain open if there are the right acquisition opportunities which are a nice complement to our strategic priorities, we will continue to pursue that.

However, we believe that even if you're doing a very attractive deal, you're easily in a 10 time multiple, we believe that if we invest organically and even if it's a two-year payback, it's a much more compelling offer.

So we believe that is also going to help, long term, the company grow organic sales and EBITDA also in a very attractive way if you think about return on assets, those kind of metrics..

Thank you very much, guys. Appreciate it..

Thank you..

Okay. Operator, with that, we have no further questions at this time. So we will go ahead and conclude our conference call. With that, I certainly want to thank Andreas and Doug. And on behalf of all us here at Spectrum Brands, we want to thank you for participating in our fiscal 2017 fourth quarter earnings call. Have a good day. Thank you..

This concludes today's conference call. You may now disconnect..