Rayovac 2013 Annual Report Download - page 5

customer channels and geographies. Think of these as like
businesses for like retailers.
Genito: Given its size, our accretive HHI acquisition was
transformational in nature, adding a major new leg to our
platform of businesses and giving us increased scale, diversity,
margins and free cash flow from brands with largely number-
one market shares. We think it was the right acquisition at the
right time, and we now have identified bolt-on opportunities
for HHI as well. Our approach to acquisitive growth is patient
and disciplined, no matter what the size of the target candidate
might be.
Can you talk about Spectrum Brands’ track record
for acquisitions, integration, leverage reduction,
and margin enhancement?
Genito: In our skills set, we think we are a proven integrator.
We exceeded our synergy goals in the 2010 Russell Hobbs
acquisition, rapidly integrated our FURminator and Black
Flag tuck-in purchases, and have integrated our large HHI
acquisition smoothly and ahead of schedule. Our strong free
cash flow generation, enhanced by our $1.2 billion of usable
NOLs in the U.S., has been used primarily to reduce debt,
specifically $580 million of term loan repayments since the
start of fiscal 2011 to further reduce interest expense. Our total
leverage declined from 5.4 times in fiscal 2009 to 3.4 times
in fiscal 2012. Our target total leverage range is 2.5 times to
3.5 times. Our cost of debt has fallen from over 9 percent in
fiscal 2010 to below 5 percent today, and annual cash interest
payments have declined significantly from 3 refinancings in
recent years. We have a relatively low appetite for capital
expenditures, and more than two-thirds of our spending is for
new product development and cost reductions.
We think our business model is resilient and can withstand
pressures associated with economic uncertainty, as our
performance has shown in this extended recessionary period
with a challenged consumer. For instance, we have steadily
grown our adjusted EBITDA margins by about 280 basis points
from 13% in fiscal 2009 to 15.8% in fiscal 2013.
What do you mean by global continuous
improvement and global new product
development? Why are they important?
Lumley: For some years now, our businesses have been
tasked with delivering a 3 to 5 percent annual reduction in
their cost of goods sold. This continuous improvement, or CI,
focus enables us to overcome product cost increases and
other inflationary pressures, as well as invest in new products
and product enhancements. Cost improvement is a part of
Spectrum Brands’ “DNA”. Using cross-functional teams, we
approach new product development, or NPD, through global
platforms, with an emphasis on commonality of parts to
standardize and reduce supply chain costs and vendors.
What are your most important financial metrics?
Genito: Two key metrics continue to drive our decision
making – growing adjusted EBITDA and free cash flow. We
operate our Company to maximize sustainable free cash flow
and create greater, long-term shareholder value. This gives
us a clear line of sight on accountability to shareholders. Our
long-term and short-term management incentive compensation
programs are based largely on these metrics, aligning us with
investor priorities. We also have instituted a mandatory stock
ownership program for senior management.
What does the retail customer profile look like?
Lumley: We have long-term relationships with a diverse and
loyal base of customers, some over 20 years in fact. In recent
years, we have added a number of new customers here and
abroad. Our largest customer in fiscal 2013 was about 17
percent of our total sales, and the rest of our top 10 customers
accounted for about 18 percent. We pride ourselves on
providing the best retailer margin and outstanding category
management and merchandising to strengthen and extend
our retailer partnerships. We are strongly aligning with our
retailer partners to accelerate their e-commerce sales of our
products. This is a big opportunity. So there is a real place in
today’s world for best value, performance-based, home-related
products. That’s us.
What are the biggest risks to Spectrum Brands?
Lumley: It is a question every company assesses. Risk
management is ongoing. But because of our product and
geographic mix and balance, and the predictability and strength
of our cash flows, we really do not see major, overriding risks.
We are seeing erratic competitive responses to the success of
our value-based market share growth – increased discounting
and promotional activity generally from slower-selling,
premium-priced brands which may be declining. But we are
ready for that and are meeting it head-on. Value is our weapon,
and, again, it is a winner in today’s market.
How will Spectrum Brands keep growing?
Lumley: We enjoy steady, high cash flow generating
platforms in batteries and appliances, with their powerful
brands, joined with higher-margin, expanding pet supplies
and home and garden businesses. Now add to that HHI with
its strong margins and major global growth opportunities in its
three categories of residential locks, builders’ hardware and
plumbing. We have “umbrella”, hero products launching now
to drive growth. International expansion remains a significant
opportunity. And we continue to pursue organic growth with a
mix of volume increases, new retailers, retail distribution gains,
new products, cross-selling opportunities, select pricing actions
and, again, geographic expansion.
In closing, Tony Genito and I want to thank our Board of
Directors for their continuing commitment and valuable
guidance. We also are grateful to our talented employees
around the world for their dedication, productivity and
enthusiasm in building an even stronger Spectrum Brands. We
look forward to continuing our journey to provide an even more
prosperous future for our stakeholders.
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David R. Lumley
Chief Executive Officer
Anthony L. Genito
Chief Financial Officer
December 20, 2013