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Edited Transcript of SPB earnings conference call or presentation 13-Nov-19 2:00pm GMT

Q4 2019 Spectrum Brands Holdings Inc Earnings Call

NEW YORK Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Spectrum Brands Holdings Inc earnings conference call or presentation Wednesday, November 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Maura

Spectrum Brands Holdings, Inc. - Executive Chairman & CEO

* Douglas L. Martin

Spectrum Brands Holdings, Inc. - Executive VP & CFO

* Kevin Kim;Divisional Vice President of Investor Relations

* Randal D. Lewis

Spectrum Brands Holdings, Inc. - Executive VP & COO

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Conference Call Participants

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* Carla Casella

JP Morgan Chase & Co, Research Division - MD & Senior Analyst

* Faiza Alwy

Deutsche Bank AG, Research Division - Research Analyst

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Karru Martinson

Jefferies LLC, Research Division - Analyst

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Richard Samuel Reid

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Robert James Labick

CJS Securities, Inc. - President & Director of Research

* William Michael Reuter

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2019 Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, November 13. Thank you. I would now like to introduce Mr. Kevin Kim with Spectrum Brands. Mr. Kim, you may begin your conference.

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Kevin Kim;Divisional Vice President of Investor Relations, [2]

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Thank you, Zetania. Welcome to Spectrum Brands Holdings Fiscal 2019 Q4 Earnings Conference Call and Webcast. I'm Kevin Kim, Divisional VP of Investor Relations and moderator for today's call. To help you follow our comments, we have placed a slide presentation on the events calendar in the Investor Relations section of our website at www.spectrumbrands.com. This document will remain there following our call. Starting with Slide 2 of the presentation. Our call will be led by David Maura, Chairman and Chief Executive Officer; Doug Martin, Chief Financial Officer; and Randy Lewis, Chief Operating Officer. After their opening remarks, we will conduct the Q&A session.

Turning to Slides 3 and 4. Our comments today include forward-looking statements including our outlook for fiscal 2020 and beyond. These statements 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 today, November 13, 2019, and our most recent SEC filings, and Spectrum Brands Holdings most recent 10-Q and 10-K. We assume no obligation to update any forward-looking statements.

Also, please note we will discuss certain non-GAAP financial measures in the call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website.

I will now turn the call over to David Maura.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [3]

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Thanks very much, Kevin. Thanks, everybody, who's joining us on the phones today. Look, good morning. I'm extremely pleased to update everyone today on our progress. As we stated 12 months ago, the goal is to stabilize our company in 29 (sic) [2019] and position it for growth in 2020. And today, we are confirming that. We have stabilized our business in 2019, and we are returning to profitable growth in 2020.

We ended fiscal 2019 on a very strong note. The fourth quarter in fact reflecting the best quarterly top and bottom line year-over-year growth of the entire year, giving us significant momentum as we enter 2020. We also have a significantly stronger balance sheet. We have a tremendous amount of liquidity. And we delivered on our full year adjusted EBITDA expectations. Our management team is focused on delivering stability. We focused on delivering stability in '19 and we emphasized the importance of execution, investment and with the resetting of our Home & Personal Care appliance business. Despite the added challenges in 2019 of tariffs, the difficult selling season for our Home & Garden business, our teams rose to the challenge and overcame all the external headwinds that were presented to us in 2019.

Pet had a fantastic year, posting both healthy top and bottom line growth. Home & Garden benefited from shelf space gains. And while HHI's revenues were somewhat below our expectation, the team at HHI was able to deliver on their profitability goals for the full year, in fact expanding EBITDA margin by 20 basis points. Additionally, the team worked through the divestiture of our battery and global auto care businesses, and very importantly kicked off a multiyear global productivity improvement plan, which we now expect to generate over $100 million of run rate savings in the next 18 to 24 months. The vast majority of these savings will be redirected to reinvest in our base businesses to further foster future growth and to offset additional tariff cost pressures as we enter fiscal 2020. We believe with the actions taken over the past 18 months, we have set the new foundation of Spectrum Brands, which will enable us to deliver significant long-term value creation and produce sustainable growth going forward.

I would be completely remiss not to pause and take an opportunity to thank all 13,000 of our employees globally. These Spectrum Brands associates around the world not only helped me and the senior team with the divestitures that we've previously mentioned, but also implemented our global productivity improvement plan and maintained their passion and commitment to helping build a faster, smarter, stronger Spectrum Brands of the future. We would have not been able to complete over $3 billion in asset sale divestitures, deliver on our commitments under the TSAs to Energizer, pay off over half our debt in just the past 10 months, while at the same time investing behind all our business units to execute on our phenomenal turnaround plan and restore the stability of our operating businesses without the relentless focus of everyone on the team. I'm very, very proud and honored to be associated with each one of you.

And for all the -- our partners, employee partners who are dialed in, I want to thank you sincerely from the bottom of my heart. Thank you so much for all your efforts in '19.

If I could turn your attention to Slide 7. 2019 accomplishments plans going forward are as follows.

First of all, we delivered $567 million of adjusted EBITDA in fiscal '19. And we overcome headwind -- we overcame headwinds from tariffs, a softer U.S. housing market, challenging weather and FX.

Secondly, we materially improved our capital structure. Our net debt declined from over 5.2x to 3.1x as we sit here today. At the end of 2019, our total -- our net debt to EBITDA was 3.1x, which hit our target. And this was accomplished with the divestiture of 2 business units, which allowed for debt reduction of [$2.4 billion].

Third, we decreased our average borrowing rates. We most recently extended the duration of our liabilities by tendering for the majority of our 6.58% notes and issuing $300 million of new 10-year paper at 5%, extending duration and lowering our cost of capital.

Fourth, we returned $350 million

[Audio Gap]

through share repurchases of $269 million and dividends of $86 million.

The Board of Directors and I currently believe that our shares are materially undervalued relative to our intrinsic worth. As such, we're announcing this morning plans to repurchase up to an additional $250 million of our shares. We will continue to maintain prudent leverage as we expect to generate approximately $250 million of free cash flow in the current fiscal year.

As we enter the new year, our drive for vision, clarity and focus remains firm. Our passion to simplify our business model and to run our company like true owners with much greater efficiency and higher returns has only increased. We plan to grow both organic sales and EBITDA in 2020 and beyond. After stabilizing the company in 2019, I am very pleased to report to you all that we expect all 4 of our business units to grow in 2020.

Our Spectrum 2020 guiding principles remain vision, where we're taking the company; clarity, what we prioritize; and focus, how we execute. This is our pathway to a consumer-driven mindset. We will accept nothing but outstanding quality and service while increasing innovation and marketing investments behind our brands. These actions are driving a culture of greater accountability, much quicker decision-making. And with an experienced and energized leadership team refreshed with new talent and focused on operational excellence, we're positioning our company for improved sales, earnings and sustainable free cash flow growth.

Now you'll hear more from Doug on the financials, and Randy will give you an update on the business units. Over to you, Doug.

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [4]

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Thanks, David, and good morning, everyone.

Turning to Slide 9 and a review of Q4 results from continuing operations beginning with net sales. Net sales increased 1.9%; excluding the impact of $12.5 million of unfavorable foreign exchange. Organic net sales grew 3.2%, with growth in Global Pet Care, HHI and HPC being partially offset by a decline in Home & Garden.

Gross profit fell 3.5%. Gross margin of 33.7% decreased 190 basis points as higher input costs, tariffs and accelerated depreciation relating to a decision at the end of the year to close a -- close certain Latin America plants were partially offset by positive pricing and productivity.

SG&A expense of $232 million decreased 7.5% or 23.4% of net sales this year compared to 25.8% a year ago driven by lower HRG merger-related costs and other cost control efforts.

Operating loss was driven by the impairment of Home & Personal Care goodwill and other intangible assets of about $151 million, higher input costs and tariffs, higher depreciation and amortization, and higher restructuring charges related to the global productivity improvements.

Net loss and diluted loss per share were driven by the operating loss partially offset by income tax benefit, the unrealized gain in our Energizer common stock, lower interest expense and a smaller loss from discontinued operations. Adjusted diluted EPS of $1.13 increased 10.8%, due to lower interest expense and lower adjusted average shares outstanding.

Turning to Slide 10. Q4 interest expense from continuing operations of $37 million decreased $20.7 million driven by lower debt levels.

Cash taxes during the fiscal year were approximately $53.9 million, comparable to last year.

Depreciation, amortization and share-based compensation from continuing operations of $55.7 million increased from $33.6 million last year primarily due to higher share-based compensation and the impact of HPC depreciation and amortization this year as a result of moving the unit back into continuing operations.

Cash payments for transaction and restructuring and related charges for Q4 were $9.5 million and $6.7 million, respectively versus $21.1 million and $36.8 million, respectively last year. Higher cash spend last year was driven primarily by the HHI DC consolidation and divestiture activity.

Moving to the balance sheet, Slide 11. We completed Q4 in a strong liquidity position, including $779 million available on our $800 million cash flow revolver and a cash balance of $627 million.

Debt outstanding was $2.4 billion, down 50% from last year. And as a reminder, over the course of 2020, we plan to repay the previously disclosed $200 million to Energizer in connection with the divestiture of our Varta business. And we'll complete the redemption of the remaining $117 million of 6.58% bonds this week.

Capital expenditures were $18 million in the quarter versus $19.3 million last year.

Now turning to Slide 12 and our 2020 guidance. Spectrum Brands expects low single-digit reported net sales growth, with foreign exchange expected to have a slightly negative impact based on current rates.

Adjusted EBITDA is expected to be between $570 million and $590 million, and this guidance includes global productivity improvement plan benefits and the impact of tariffs that are currently in place. Now from a phasing perspective, we expect Q1 to be negatively impacted by the annualization of tariffs and stranded costs related to the divestitures. We expect growth in the remaining 3 quarters of the year.

Fiscal 2020 adjusted free cash flow from continuing operations is expected to be between $240 million and $260 million.

Depreciation and amortization is expected to be between $200 million and $210 million including stock-based compensation of between $55 million and $60 million versus $54 million in 2019.

Full year interest expense is expected to be between $140 million and $150 million including approximately $10 million of noncash items.

Restructuring and transaction-related spending is expected to be between $90 million and $100 million.

And capital expenditures are also expected to be $90 million and $100 million, including productivity plan improvement enabling capability investments.

Cash taxes are expected to be between $45 million and $55 million, and we do not anticipate being a significant U.S. federal taxpayer during fiscal 2020 as we continue to use net operating loss carryovers. We ended the year with approximately $800 million of usable federal NOLs. And just as a reminder for adjusted EPS, we use a tax rate of 25%, including state taxes.

Now I'll turn it over to Randy for a more detailed look at the business unit performance.

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [5]

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Thanks, Doug. Good morning, everyone, and thank you all for joining us today. I want to open by reiterating David's comments that we are very proud of our combined accomplishments during the fiscal 2019 year in the face of material headwinds. We're excited about the future outlook of the platform as benefits start to deliver from our global productivity improvement program execution. So now let's walk through the results of each of the business units.

Turning to Slide 14 in Hardware & Home improvement the fourth quarter reported net sales and organic sales increased 1.1% and 1.3% respectively while adjusted EBITDA improved 3.5%. -- despite the softer U.S. housing market and slowing remodel activity, residential security sales benefited from new product innovations in both electronics as well as mechanical products offering features from our Smartkey technology.

In the quarter, we were very pleased with the successful launch of our new cloud platform and new mobile app. This proprietary system will be crucial to future projects in the connected security market, making it easier for the consumer to have real-time access and control of their locksets anywhere they have Internet connectivity. The recent launch of Aura, our new Bluetooth-enabled lock under the industry-leading Kwikset brand, is just one of several examples of products that will sit within this new ecosystem. Looking forward, we are very excited about the outlook on electronic deadbolt and smart locks in 2020, given the relatively low but fast-growing U.S. residential adoption rates. More importantly, we are excited about our electronics product road map and the new innovations that we will add to our ecosystem in 2020 and beyond. Similar to this year going forward, we expect more moderate newbuild activity, but nonetheless we are confident in our ability to grow with our market-leading brands, excellent service levels, product quality in both the new construction and repair and remodel markets.

Now to Home & Personal Care, which is Slide 15. Fourth quarter reported net sales increased 1%. Organic net sales grew a solid 4.2%, while adjusted EBITDA declined 17.2%. Sales growth reflected sequential improvements from the mid-single-digit declines through the first 3 quarters of the year that have been driven by prior year hair care distribution losses in the U.S. We previously communicated 2019 to be a year of resetting this business. The division's new leadership team, installed in February of this year, has done an excellent job as rebalancing cost structure and with the objective of accelerating profitable growth, has undergone a comprehensive review of its guiding strategy. In short, our way forward can be summarized as a renewed commitment to support our trusted brands of Remington, Black & Decker, Russell Hobbs and George Foreman in a global sense by being a cost-effective producer of compelling and innovative products that benefit consumers' everyday lives. Additionally, our biggest ever investment which established Remington as the official global styling partner of Manchester United is already enhancing the brand in markets around the world.

And our insights-driven innovation pipeline gives us great confidence. We have a product road map that will drive accelerated sales growth going forward. For example, the team is investing internationally to drive awareness of the innovative Remington curling straight hair styler that features unique twisted plates, enabling consumers to straighten or curl with one [device].

Also, the team is building excitement around our new market-leading George Foreman indoor grill series. As an example, we have a much anticipated new product, which is launching in the back half of fiscal 2020, has already received committed wide-scale distribution and will be supported by a dedicated new advertising [campaign].

There's so much more to come. We believe this renewed focus, new leadership on supporting our brands and investing behind fewer, bigger, better products will lead to growth in 2020 and beyond.

Moving to Global Pet Care, which is Slide 16. Fourth quarter reported net sales increased 7.9%, and adjusted EBITDA increased by 30.3%. Excluding currency impact, sales grew 9.2% in the quarter, and we saw strong growth in our top regions. On a full year basis, all 5 global regions delivered solid growth driven by the continued globalization of the business team's processes and strategies. In fiscal '19, our strongest growth came across the portfolio with our strategic core brands collectively growing 16% on a year-on-year basis.

Our dog chews business continues to perform well. We are taking share across the globe. In the U.S., which is our largest market, we picked up 2 share points as our chews brands experienced double-digit POS growth in tracked channels, which was twice as strong as the overall category.

Across pet, we continue to work to optimize global manufacturing, reduce the supply chain costs and optimize brands and SKUs to improve our margin structure. Our pet team is committed to shedding unproductive assets and focusing activities to invest more time and resources into our top growth brands. This will help position our pet care business well, given the future category growth projections due to increasing participation rates and the passion of pet owners and caregiver base everywhere.

Turning to Home & Garden, which is Slide '17. Fourth quarter reported net sales decreased 4.3% and adjusted EBITDA decreased 1% primarily due to weather that was less conducive to insecticide sales. Despite these results, full year sales improved 1.6%, and we grew our share again in the category largely due to strategic alignment with customers and strong growth in herbicides and repellents categories. In 2020, our targeted growth will be driven by new products and by marketing support that will convert consumers newly entering the category. We continue to believe strongly that the barriers to entry remain high in this business, and our value proposition to consumers with strong brand equities and increasing investments in product development and marketing will accelerate Home & Garden growth rates and continue our market share growth.

Turning to Slide 18. We also wanted to provide an update on our global productivity improvement plan. This program continues to be our most important strategic initiative at this point. Through its efforts, we are changing our operating model to allow quicker, more globally aligned decision-making within each of our businesses, driving more focused and relevant product innovation with enhanced consumer analytics and R&D processes. And we're also centralizing and standardizing the functions that support those commercial operations with a very strong focus on process efficiency and technology enablement.

Savings from these changes, along with significant benefits from new center-led sourcing processes, are creating funding that we will reinvest in higher levels of marketing and further technology enhancements. Since our last call, we have completed wave 1 of our strategic sourcing work stream with over $35 million of run-rate savings phased in during fiscal 2020. And we've initiated wave 2 that is expected to deliver even more savings in [the future].

Additionally, we have begun executing changes in our international commercial structures. And we're improving gross margin rates in our Global Pet Care business through the closure of Latin American manufacturing plants. We now expect the gross annualized savings from sourcing and other global productivity improvement program cost improvements to be at least $100 million and that these savings will be at full run-rate within the next 18 to 24 months. In the short term, these benefits will also be used to help offset the estimated $80 million to $85 million of incremental tariff headwinds in fiscal '20. We look forward to continuing to provide more details on the GPIP benefits on our future calls. Now to David.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [6]

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Yes. Thanks, Randy. Thanks, Doug. Look, before going to Q&A, I've got to take a moment to just say hey, thanks to Doug Martin. Doug has served us for 5 years. And without his steady hand and execution this year, I wouldn't have been able to have got the divestitures done, the TSAs implemented. Doug has just been a great team player, a great business partner. And I just want to thank Doug publicly for his 5 years in Spectrum Brands and wish him the very, very best in his next endeavors.

Also, Dave Prichard has been with us for about 9 years, and he is also retiring in December. And we want to thank Dave Prichard for all his many contributions here at Spectrum Brands.

I also want to welcome on board Jeremy Smeltser, who has already hit the ground running and is knee-deep in Galileo and -- I'm sorry, global productivity improvement programs. And I just really welcome Jeremy to the team who joined us October 1. The transition was exceedingly smooth.

So again, that's a big thank you to both Doug and Jeremy. So Dave, Doug, Jeremy, from all of us in Spectrum brands, thank you. And I'll turn it over to Kevin for follow-up questions.

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Kevin Kim;Divisional Vice President of Investor Relations, [7]

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Great. Zetania, let's just dive right into Q&A.

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Bob Labick with CJS Securities.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [2]

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Congratulations on a nice fiscal '19 and also to Doug and Dave on their pending retirements and next ventures.

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [3]

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Thanks, Bob.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [4]

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So I wanted to start with the GPIP, and maybe you could just expand a little bit. Obviously, you're progressing very well, and you have some very big expectations for savings. Can you talk about how you plan to balance the reinvestment back into the company in incremental marketing versus R&D versus other things. Where is this -- where are the savings going? And how will they ultimately drive future growth?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [5]

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Look, I'll lay out the big strokes, and then I'll turn it over to Randy for more details. Look, our initial cut at this was I wanted to get about $100 million of productivity flowing through the P&L. And we initially wanted to drop about half of that to our shareholders and reinvest the balance into R&D, innovation, new product development and marketing. So as I've been saying, I think it's been 18 months since I took on this new endeavor. I really want to focus the company towards more of a sales and marketing organization and really drive organic growth and get to better places. And so it's really a mindset shift. It's really a new way of doing business.

But the next couple of waves that we're going to go through quite frankly, Bob, are going to be about automation, really bringing IT enablement. Jeremy Smeltser actually has got a fantastic background. He's done this before. And so it's just the ability to get data; quickly slice the data; analyze the data; make faster, quicker, better decisions-- it's going to bring a lot of prosperity to us and all our stakeholders. And that's kind of where we're going. Those are the broad strokes.

I think to be blunt, given the tariff situation, we'd be less than honest with you if we didn't tell you, look, we're unfortunately going to be using a lot of the global productivity improvements in 2020 to just offset these unfortunate tariff headwinds, which we view as transitory but they are nonetheless really affecting our reported earnings in a negative way. And so we're using more of those savings than we'd like temporarily to offset those. I think that'd be the only commentary I'd give around it. Randy, if you want to expand?

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [6]

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Yes, Bob, I would just say the key thing for us is that we're efficient with this reinvestment. So we're focusing very heavily on capability development within the organization, so that we can ensure that the money that we are choosing to put back into the business is going to have a positive return for all of us. So it's kind of broad-based, and it varies from one business to another based upon where we are in different stages of that process. But we are most focused on ensuring that we're chasing the right innovation based upon real data insights from consumers and not from the traditional approaches within CPG companies. And then being more efficient at that development, and then last, being able to effectively engage the consumers and the retailers and the storytelling around that innovation. So it's going to be a measured pace. We don't expect to be at the full investment run-rate until well into the next fiscal year, but we're already seeing benefits from the beginning of those reinvestments.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [7]

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Okay. Great. It's very helpful color. And then we've talked about this a little bit on previous calls. But can you talk a little bit about the online strategy and penetration and how you're targeting incremental online growth in 20 -- fiscal '20 and beyond?

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [8]

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Yes, Bob, that's one of the key work streams within the global productivity improvement program is omnichannel operations. And it's really key that we don't separate out online as being different than bricks and mortar. And so the mindset change here is that we talk omni, which is having all aspects of opportunities to interface with our consumers engaged in one overall encompassing strategy. And so we are building very key capabilities with data scientist analytics that are driving us for different behaviors in that space. But that's one of the areas that will be center-led across the 4 businesses as we go forward into this year.

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Robert James Labick, CJS Securities, Inc. - President & Director of Research [9]

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Okay. Super. Then last one for me, I'll get back in queue. Obviously, a terrific year on the pet side. One of the things that's also been discussed previously was some of the operating efficiencies, I guess, at the European tolling businesses. Any update on improving those operations in fiscal '20 or beyond or where that stands?

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [10]

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So across the European business, we've done a substantial amount of work over the course of fiscal '19. It's kind of tied up in the strategy of globalizing our businesses. We talked earlier about -- in my prepared remarks about streamlining the decision-making within the businesses. And that's part of the previous matrix structure that we had 18 months ago or so that kept us from being aligned on strategies. And so we've driven a substantial amount of costs out of our European business within pet and seen substantial improvements in the effective rates of that business as a result of that. So overall, we're going to see good -- really good margin expansion in that business. And that's -- a main driver of it is the European restructuring.

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Operator [11]

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

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [12]

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Congrats to Doug and Dave. First question is actually on the savings and the tariffs. So you've got $100 million of savings coming in the next, call it, 1.5 to 2 years. $80 million to $85 million in incremental tariffs, it's a little higher than you had originally anticipated. So as you think about the deployment of those savings, how much is pricing contributing to that? And to the extent that you have these savings, what's your view on what -- if there's a pull and push, like are you -- are they coming equally from reinvestment versus dropping to the bottom line? Or are you going to make sure you protect the reinvestment and maybe less flows to the bottom line? I'm just trying to understand your thought process on that.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [13]

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Yes, let me take the headline. Randy will do the details as usual. Look, I am wildly proud of our team to do $567 million EBITDA in '19, to be staring at a wave of another $80-plus million of tariffs in 2020. The run-rate numbers we gave, we're not there yet. And oh by the way, we're going to step up investment in marketing spend by another $22 million run-rate, probably half of that at least to hit the balance of what's left to 2020. We are not backing away from doing what is right for the company long-term.

In other words, let me state it another way. We could manufacture a $600 million EBITDA number in 2020 if that's -- if all we wanted to do is impress the street. We want to run this business like owners, and we want to continue to invest for the long haul. And so we will continue to prioritize reinvestment in R&D, innovation and marketing until we get the top line results that this company is capable of. I'll stop there, and I'll let Randy clean up any mistakes I made.

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [14]

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Olivia, so I would tell you to think of pricing varying by business unit based upon kind of the channels, the competition and the strength and positioning of the brands. But overall, the offsets on pricing are the largest portion of offsets that we have to the tariff headwinds. And so when we look at the remaining savings coming out of the global productivity program, you're exactly right. We have a strong bias to protect those reinvestments. We obviously have to balance that across all of our stakeholders. But as David said, we are highly committed to the messaging that we've been giving for the last 18 months, which is we're changing the focus and we want to be much more concerned about where we're going to be in 2 or 3 years than where we're going to be in the next quarter.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [15]

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That makes sense. I appreciate that. And then on cash flow, it was nice to see that it stabilized a bit and to see the improvement that you're expecting for next year. But it is -- it was a little bit low relative to our expectations. So first, what didn't go quite as you anticipated for fiscal '19 particularly relative to last quarter's commentary? And then what are the big drivers of the improvement in fiscal '20 beyond the savings program? And should we expect more improvement in first half versus second half, given the comps? Or will it still be primarily second half loaded?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [16]

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Well, I'll just clarify that cash flow, you mean free cash flow, EBITDA? What are you talking about?

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [17]

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Free cash flow.

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [18]

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Free cash flow, Olivia in 2019 as you know was kind of difficult to see through to, given the divestitures and the discontinued operations and allocation of interest expense across the 2. It actually came in pretty much where we expected it to overall when you think about the working capital impact in [discount], which I know you don't have visibility to. But that's really where we expected it to come in because we had so much cash on the balance sheet at the end of the year, though, did not -- and we have done this earlier in the year -- we dialed back on some factoring programs, which are really cost-effective from a capital structure management perspective, but weren't necessary when we were sitting on cash. So if there was any one thing that was different than our expectations, it would have been -- it would have been that.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [19]

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I also -- look, I think what -- from my seat, right, we're trying to generate $100 million in productivity savings, but we're spending $100 million of cash restructuring to get it. That's not a bad payback, right, if the $100 million of savings is in perpetuity, and it paid for itself in less than 18 months, that's probably a good allocation of capital organically. I mean that as an understatement obviously. I think that's really good allocation of capital. But clearly those cash restructuring charges that are embedded in our midpoint of $250 million of free cash flow, they are going to roll off. And so obviously as you get into 2021, you have a pretty nice free cash flow left. So I'm pretty bullish on not only the free cash flow for 2020, but the free cash flow growth going forward, if that helps.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [20]

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Yes.

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Operator [21]

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Your next question comes from the line of Sam Reid with Wells Fargo.

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Richard Samuel Reid, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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Awesome. Let me add my congrats to Doug and Dave as well. Quick question here on global pet again this quarter, I wanted to get a sense as to how this growth compares to the underlying category especially in the U.S. because it really does seem strong given the somewhat mature nature of the underlying product segment. And then along those same lines, could you walk us through any shelf space gains you might be getting there as well?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [23]

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Look, I think our pet business as you know was mismanaged for a number of years. I think our pet business was just a collection of me doing acquisitions. I think over the last 2 to 3 years, under -- well, actually the last year under JP. John has taken over that business. He's got a team that's got incredible vision and passion for innovation. I think I've spoken to you publicly -- I was early. I think through most of the past 18 months, I was talking about how pet was going to turn, and it took a little longer to turn. But I would just tell you, we've got a team that's really walking the talk when it comes to real R&D, real new product development. I mean I was at the pet expo show down in Orlando. I think I mentioned this in a previous public call. I mean we had 3 years worth of new product offering, a real product road map with really innovative stuff. So look, we are absolutely outperforming the category. And we're going to continue to outperform the category because we have what the customer wants. We're bringing news and excitement and innovation and we're just getting started. So congrats to John and the entire pet division. We are extremely proud of them and are looking forward to the best yet to come out of pet. Randy can add details.

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [24]

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I think you said it well, David. And Sam, we are growing above the category. We would look at the U.S. category where we compete and expect CAGR there in the 2.5% to 3% range. Obviously, our last 2 quarters have been well ahead of that, and that's indicative of all the efforts that David just talked about. And we have a very clear strategy that we're trying to get to there, and we're starting to deliver on that.

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Richard Samuel Reid, Wells Fargo Securities, LLC, Research Division - Associate Analyst [25]

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Awesome. Thanks for color. It's really helpful. I wanted to maybe sneak another one in just quickly on HHI. Just kind of how much of the growth during the quarter was reflective of pricing specifically, and how is that pricing maybe impacting your volumes in this segment as you take that?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [26]

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I think we want to be careful on pricing because we have competitors that listen in and all the rest of that fun stuff and we're public. Look, we did take pricing in that division, right? We're #1 market share position. We're dominant brands. We are the clear leader. I will tell you that this is not an inelastic place to play. And so you've got to be really [cut]. Clearly, we have a very interest rate-sensitive housing market. As you guys remember, I think it was this time a year ago, I think I spooked everybody on housing, saying I was seeing a slowdown, which we did experience.

I think we're working much better with our retail partners. I want to thank our retail partners. We've recently seen some POS uplift due to some of our pricing programs. We are very excited about some of the new digital offerings we're coming out with. And we launched our own cloud, which is basically allowing us to have a ubiquitous offering.

I think one of the things we want to focus on going forward in HHI is bringing clarity at point of sale. Digital locks are really just where growth is. We're the leader there. We want to continue to be the leader. We want to put more chips on that table. But it's still confusing for a DIY-er to go there and know whether they need a Zigbee, a Z-Wave or a HomeKit, Google, Apple, Wi-Fi, Bluetooth. And so we need to continue to bring clarity there and help the customer at the point of sale. But we expect another solid year out of HHI.

We wish housing was a little bit better. We see, as opposed to last year, we kind of see multifamilies slowing down. We think kind of the single-family space is doing okay. Clearly, with full employment and interest rates where they are, that's very supportive of household formation. But we remain #1 there, and we're going to continue to invest behind that business.

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Operator [27]

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Your next question comes from the line of Ian Zaffino with Oppenheimer.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [28]

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David, I just kind of want to key in on your comments about the stock being undervalued. Is there a target you have out there for the buybacks? Or maybe just broadly speaking, what's sort of the pace of the buybacks? And what should we sort of expect of that going forward? And then I have a follow-up.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [29]

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Well, the lower the price, the more we'll buy, the higher the price, the less we'll buy. No, look, I have -- we have -- the Board and I have a view on what our intrinsic value is. I've been in this space for about 20 years. I've never seen the discrepancy between what people call value stocks and growth stocks. And in the consumer product space, the delta between what somebody calls growth at 2% or 3% and value that a lot of companies reporting negative 2%. And I mean it's 10, 20x EBITDA deltas. It's ridiculous in my mind. And so I look at our business. I look at our free cash flow. I look at our brands. I look at the portfolio of assets we have. And we think that shrinking the flow makes sense at these levels. I think anybody that would look at where we trade on a multiple of EBITDA or free cash flow yield, hopefully, their HP 12C works as good as mine.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [30]

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Okay. And then also just touching on some of the hair care distribution losses that you experienced last year, are there new products out there that you're going to be launching to maybe backfill some of those losses or maybe you recoup some of those losses? Or how do we kind of think about just that (inaudible)?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [31]

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Absolutely. We just won back category captain at a fantastic retail partner. We didn't love kind of the shelf space we had even after that. We're having those conversations. Randy can tell you about -- I mean we have a plethora of new product launches that we're excited that are coming out. We didn't just enter into an agreement with Manchester United for Europe, we've got a lot of new exciting Remington. Remington is one of our best known brands in our entire portfolio. And the growth we've experienced with women here -- with women's hair care has been explosive. And it's just our European teams have just been doing a much better job, to be completely brutally honest, with consumer insights. But now we've got a brand-new team running the United States since, I think, February, April. It's almost 100% new leadership team, and that's where we're putting our money, consumer insights and marketing. And you're going to see a complete relaunch of George Foreman in a couple of months.

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [32]

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Yes, Ian, this is Randy. I would say, to follow up David's comments, we feel that we've had a very strong capability in product development for quite a while. But we weren't necessarily pointing that capability in the right direction with regards to either what the consumer was wanting or how to ensure that we were managing our portfolio across our retail customers very well. I'm extremely proud of the new team and what they've been able to do to not only figure out how to get the right insights to point our capabilities very strategically, but also digging in and having tough conversations with our fantastic partners and we've not been in the current position with regards to partnership with key retailers in my history with the company, very strong and still very difficult conversations in today's world. But we're now playing in the space as far as that relationship that we haven't been for quite a while. So it's products, it's also relationships. It's also the data that David talked about as far as bringing to them the analytics about how to optimize their category. And we're going to do extremely well with that.

And then just in the Remington business, we talked about the Manchester United partnership, and that has been phenomenally successful so far. We've had over 300 activations in 25 different countries with that approaching 1 million consumer engagements. We're seeing very positive returns with perception and intent to buy as a response to that. So we're very happy with that.

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Operator [33]

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Your next question comes from the line of Faiza Alwy with Deutsche Bank.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [34]

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Congratulations from me, too, on Doug and Dave's retirement. So my question is just if I look at Slide 18, it feels like there are a lot of sort of interesting things going on at Spectrum, a lot of change going on. And I just wanted to hear from the both...

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [35]

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That's an understatement.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [36]

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Yes. So I wanted to hear from you, Dave, and maybe from Randy a little bit, in terms of how are you ensuring that -- you had a lot of execution issues a couple of years ago. So how are you ensuring that you don't run into those types of problems again?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [37]

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Look, I hate looking in the rearview mirror, I would say most of the guys in this room, well, let's just look forward. Look, I think a lot of those mistakes with -- going forward, we are going to make sure we measure twice, cut once. We're not -- we are doing this with a fantastic partner within A.T. Kearney. We are using, on any given day, 40 to 70 FTEs from ATK. This is a management team that is no longer looking to reduce costs by issuing simple what they call reduction in force. We are looking to educate our employees to help them become the best versions of themselves as they can. We're looking to put IT, automation, big data in front of them to help them drive decisions to be much more efficient. And so it's just a new mindset. It's a new way of doing business. Yes, it's a lot of change but it's being underwritten exceedingly well. And honestly, I owe a debt of gratitude to Randy and Doug and Jeremy and Ehsan Zargar and all the operational leaders for partnering with an outside team that helps double-check, dot every I, cross every T and honestly hold us accountable. It's very hard to audit oneself. It's extremely beneficial to have an outside third-party in every day working with you hand to hand, locked arms to go achieve a goal. And I think that would be the best way I could describe the different approach that's being taken this way as opposed to the missteps of the past that you referenced.

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [38]

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Faiza, this is Randy. I believe you and I spoke about this maybe a few weeks back, and I think it's a great question. David is exactly right. This is -- it's a completely different company than the 2.5 years ago when those previous projects were undertaken. And this is an internally executed transformation, but we're doing it in a very collaborative way. We're doing it with a fantastic partner. We're doing it with a tremendous amount of oversight, and it's just a different environment completely. I'm highly confident in our ability to execute these initiatives and to do so with net positive results along the way. We've got new leadership in 3 of our 4 businesses. We've got substantial new talent enhancements within the senior leadership of each of the individual businesses. We've got new people leading our corporate initiatives. All of this has been done with an eye on creating the right type of environment to foster this change.

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Operator [39]

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And your next question comes from the line of William Reuter with Bank of America.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [40]

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You laid out the 2-year target for a run-rate basis for the global productivity improvements. Do you know what you're going to be achieving in fiscal year '20? So what would be in the fiscal year '20 P&L?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [41]

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That's for us to know and you to find out at the end of the year.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [42]

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Okay, sounds good.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [43]

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Good job. Good job with the question.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [44]

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You guys have talked a lot about the expectations that you're going to continue to have better growth of the electronic deadbolts, smart locks, et cetera. I guess can you talk a little bit about what percentage of your products are in the HHI segment are those products? And what type of growth rates you expect maybe either this year or over the next couple of years?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [45]

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It's not big enough. The denominator is still too small. That's why we're trying to grow it. But I don't know if Randy wants to give any detail. I don't know if we're going to break that out or not.

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [46]

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Yes, Bill, I would tell you, we don't really break that out, but it is clearly the fastest-growing segment within that space, both for the category and for ourselves. And so we're really excited about this cloud that I talked about and the technology that supports that on the back-end. I think as David mentioned, all of the confusion in this space, this gives us an opportunity to really cut through that and make it very simple and easy and reliable for consumers to make a choice and to be happy with it. We've got the new Bluetooth lock, Aura, that we launched a few months ago. It's doing extremely well, already clipping along at several million dollars of revenue rate in just the first couple of months. And we're -- we'll be launching another major new lock in that space within the next 4 to 6 weeks, and that one has even more potential. So it's our fastest-growing segment and our biggest, strongest focus.

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William Michael Reuter, BofA Merrill Lynch, Research Division - MD [47]

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And then lastly, you did a pretty good job of laying out both your expectations for free cash flow this year as well as what you guys are going to do in terms of share repurchases. I guess it would imply that more or less, your leverage target is around where you are right now. Is that how you guys are thinking about things?

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [48]

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To the extent that -- William, this is Doug. To the extent that we do in fact make the Energizer payment back later this year and do execute up to 100 -- up to $250 million of share repurchase, then we probably will add about 0.5 turn of leverage there.

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Operator [49]

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Your next question comes from the line of Carla Casella with JPMorgan.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [50]

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One question on the -- looking into the holiday quarter, any impact we should think year-over-year from just the number of department store closures that have gone on since last holiday?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [51]

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No. Don't worry about us on the department store end. I think we're fine. What we want to be very open about is that we do expect to pivot in our first quarter. Tariffs are impacting us, and they're going to hurt us mostly on the front end of fiscal 2020. So we expect a divot in Q1. We expect to make it up Q2, Q3, Q4. So again, I'm not a big fan of guidance, but we want you to understand the pacing of the year. Tariffs will hurt us a lot more in the front end, and then our productivity savings will flow in the back. And that's how we'll get to the full year guidance we gave you.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [52]

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Okay. Great. And then looking at those tariffs, can you give us just a little more color by segment? Like which segments will be most impacted in the beginning part of the year?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [53]

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Yes, I think right now, the stuff coming off the boat where we're having to pay higher tariffs on is going to be both in our appliance unit and quite frankly, HHI.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [54]

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Okay. Great. And then the plant closure that you mentioned, is that -- is it complete? Or could we expect any kind of inventory, safety stock or other as we go into the coming quarter?

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [55]

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These are relatively low -- relatively small rawhide plants, and we've been planning this for a while. In fact, they're closed and production has been shifted to new supply. And we have no inventory issues here at all.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [56]

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Okay. Great. And then just one last one on the M&A front, you mentioned --- M&A versus asset sales. You mentioned shedding some assets in Pet. What categories are the most unproductive? And what could be the timing on exiting? Would it be a category exit or just brand, certain brands or certain products?

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [57]

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Well, I think you're probably referring to my prepared comments. This is Randy. And what I was alluding to there were unproductive assets for those manufacturing facilities throughout Latin America.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [58]

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Oh, great. Okay. Thank you for clarifying.

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Operator [59]

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Your final question comes from the line of Karru Martinson with Jefferies.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [60]

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Just to be clear, the adjusted EBITDA guidance of $570 million to $590 million, that builds in the $80 million to $85 million of tariffs that you expected this year?

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [61]

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It does.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [62]

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Yes, it does.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [63]

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Okay. And then the...

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [64]

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It's not [assumed] .

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Karru Martinson, Jefferies LLC, Research Division - Analyst [65]

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Yes. List 4B, that would be above and beyond that?

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [66]

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That's correct.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [67]

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Okay. And I just wanted to get a sense on -- so when we talked about the dividend in the first quarter, how much of these stranded costs remain? And what's the pace of getting those out of the P&L here? Or is it all [in tariffs]?

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [68]

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Yes. Sure. Karru, this is Doug. We -- it's a number that we're not -- we won't disclose it publicly, but it's also not a huge number. It's a headwind for us, and we've been working against it as we have exited some TSAs with Energizer. Energizer's exited TSAs with us. But this is also being addressed by the global productivity improvement program. And we started this work well before the deals were closed. And the only governor on it is our timing on the exits across the different markets around the world. So it's in there. It's in the guidance. It's being addressed. I just thought it was important to mention the timing and the impact of the phasing of it on our quarter.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [69]

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Okay. And just lastly when you guys look at Home & Garden, are you seeing shelf -- shelf sheer -- shelf share gains when it comes to Roundup?

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Randal D. Lewis, Spectrum Brands Holdings, Inc. - Executive VP & COO [70]

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So this is Randy. We are seeing some gains, especially in home centers with our brands. And I think it's more to do with our relationships and the products and the investments that we're putting behind our brands than necessarily anything else. But I can tell you, again, relationships are strong. Product innovation pipeline is strengthening and we're working very well with those key customers as well as the mass channel. And I think that's the main driver of our gains there.

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Karru Martinson, Jefferies LLC, Research Division - Analyst [71]

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Okay. And I'd just like to add my thanks to Doug and Dave here for their service. Thank you.

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Douglas L. Martin, Spectrum Brands Holdings, Inc. - Executive VP & CFO [72]

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Thank you.

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [73]

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Thanks, Karru.

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Kevin Kim;Divisional Vice President of Investor Relations, [74]

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Thank you. And with that, we've reached...

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David M. Maura, Spectrum Brands Holdings, Inc. - Executive Chairman & CEO [75]

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Go ahead, operator.

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Operator [76]

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There are no further questions at this time.

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Kevin Kim;Divisional Vice President of Investor Relations, [77]

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Thank you, Zetania. So with that, we've reached the top of the hour, so we'll conclude our conference call. Thank you to David, Doug and Randy. On behalf of Spectrum Brands, thank you for participating in our Q4 2019 earnings call.

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Operator [78]

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