In this segment from Industry Focus: Consumer Goods podcast, the team continues their coverage on lesser-known companies in the mid-cap investing space.
They take up Spectrum Brands (NYSE:SPB), owner of household names like George Foreman, Black & Decker, and IAMS pet food. Spectrum's management team has pushed forward two giant deals at the outset of 2018. Learn about this consumer products conglomerate and its transformative moves below.
A full transcript follows the video.
This video was recorded on March 6, 2018.
Vincent Shen: Our next company is Spectrum Brands Holdings, ticker SPB. We're going to spend some time looking at this mid-cap stock. The company has announced a flurry of deals and major changes to its business just in 2018, the past couple of months. Before we dive into all that stuff, though, Asit, can you give us a quick overview of this business, what they're known for?
Asit Sharma: Absolutely. Spectrum Brands mirrors some of the larger conglomerates that we talk about. It has its fingers in a number of different businesses. It has a market cap of nearly $6 billion. It's organized into five major segments. These are: global batteries and appliances, hardware and home improvement, global pet supplies, home and garden, and global auto care.
Now, we're going to put global batteries and appliances to the side, although we're going to talk about that a lot in this segment. This is now a discontinued operation, because the company has announced the sale of this business to Energizer Holdings for $2 billion in cash.
Within this segment that it sold, global batteries and appliances, it has a number of appliance brands which it's now looking to sell to a number of other buyers which have not been disclosed. These brands on the appliance side within this one segment include George Foreman, Black & Decker, Juiceman, and Breadman. I want to say, sell everything but the George Foreman brand. George Foreman can sell anything. He can sell anything for Spectrum Brand Holdings. In this next phase, they're looking to get rid of the appliance brands within this segment that they call global batteries and appliances.
I know that's a lot to absorb. I'm going to repeat these segments again so we'll have a handle on them: global batteries and appliances, of which the batteries has just been announced to have been sold, hardware and home improvement, global pet supplies, home and garden, and global auto care. Now, I'd like to briefly talk about some of the brands that are in the other segments.
Shen: Please do.
Sharma: These are great staple brands. These include the Kwikset lock business; Pfister, which is in the home segment; Tetra fish products, which many of you will remember from when you were growing up, buying those products; the Dingo pet brands; Spectracide and Black Flag in home and garden; and Armor All and STP in the auto business. These are some really strong household names, very well-known labels that can be exploited, and they have higher margins than the business that's just being sold, the battery business. I'll flip it back to you, Vince. That's a brief overview of this company.
Shen: Battery business is going to Energizer for about $2 billion. There isn't a final buyer yet for the appliances business, but they say they're currently in talks with potential buyers doing some of their due diligence and in discussions for that. They expect proceeds from the sale of that business to be about $1.5 billion to $1.7 billion, so total proceeds from these divestments: over $3.5 billion. These are on top of three years of exits that the company has made from other smaller businesses that accounted for about $100 million of sales, so much smaller, but this is a climactic effort in terms of an ongoing multi-year strategic change.
On top of that, as if that wasn't enough, this huge restructuring for this company, Spectrum Brands is also combining with HRG Group (NYSE:HRG). That's a holding company that controls about a 60% ownership stake in Spectrum Brands. Spectrum is going to be merging with HRG Group. The way they position it and explain it to investors, it's better governance, broadened the base of holders for the stock, which they generally see as a beneficial move for the company.
But if we focus in terms of the business itself and some of management's priorities -- they're getting all this money, $3.5 billion or so, from these sales. They've noted that they want to use the proceeds to reduce their debt, repurchase shares, and also look into acquisitions that will help them expand their remaining business segments, the ones that you mentioned, Asit. The way the CEO described it, he said more channels, more categories, and more countries. So wanting to expand into new geographic areas. The focus, of course, here, getting rid of those two other segments, is to focus on the more profitable ones and seeing what kind of opportunities they can find there. After the sale of the battery business and I believe the appliances business, North America will make up about 85% of sales for the company, so you can understand why they see those new geographic areas, those countries, being somewhere they can expand to a little bit more.
Going forward, it seems like management is going to have a much larger risk appetite to pursue higher growth and higher-margin businesses. With the divestments, the company's EBITDA margin should improve pretty significantly, I believe going from 17% in fiscal 2017 to 21% in 2018, according to analyst estimates. More on the financials side, cash flow in the year after the various restructuring will remain pretty consistent at about $630 million. The two metrics that management really seems to focus on based on the calls I was reading and the presentations they give are their adjusted EBITDA and their free cash flow figures.