Spectrum Brands Holdings, Inc. (SPB) Q4 2017 Earnings Conference Call Transcript

Spectrum Brands Holdings, Inc. (NYSE: SPB)Q4 2017 Earnings Conference CallNov. 16, 2017, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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. If you would like to ask a question during that time, simply press *1 on your telephone keypad. Should anyone need assistance at any time during this conference, please press *0 and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded. Today is 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.

David Prichard -- Vice President, Investor Relations

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 will 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 16th, 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.

Andreas Rouvé -- President, Chief Executive Officer, Director

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 of 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 and Garden and Hardware and Home Improvement led the away 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 margins, 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 and 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 U.K.

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 and 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 continue 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 product 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 multiyear 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 brands 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 multiyear 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 from our performance by product category.

Douglas Martin -- Chief Financial Officer, Executive Vice President

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 acquisitions 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 and 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 start-up 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 is 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 in 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 product 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 air fresheners.

Turning to Slide 12: Hardware and Home Improvement rebounded from Q3 as expected to boast 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 multiyear 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 and our Kwikset Smart Code -- 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 grants 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 start-up 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 a 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 and Garden, which is Slide 14: Home and 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 and Garden nevertheless achieved record POS, record household control brand sales, and market share gains.

Home and 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 spring 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 presents.

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% percent. 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, decreased 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 wide-space opportunities and continued e-commerce growth, where the business has a significant percentage of its revenues today. As some of you have seen, the most prominent and recent exciting U.S. launch is our exciting Russell Hobbs brand, which is a stylish, top-quality family of products that we launched within e-commerce within the last few months.

Finally, to Global Batteries, which is Slide 17: Q4 reported net sales of $235.1 million, increase 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 4.1x at the end of fiscal 2017, slightly higher than the 3.9x at the end of '16, 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 purchased over 700,000 shares of stock for $87, or just under $119 million per 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 expanse 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.

David Prichard -- Vice President, Investor Relations

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

Questions and Answers:

Operator

At this time, I would like to remind everyone in order to ask a question, please press *1 on your telephone keypad. Your first question comes from Faiza Alwy with Deutsche Bank. Your line is open.

Faiza Alwy -- Deutsche Bank -- Director, Analyst

Yes, hi, thank you. Good morning. I guess my first question is just on the categories. What are you anticipating the categories are going to grow in fiscal '18, and perhaps, what did they grow in fiscal '17?

Andreas Rouvé -- President, Chief Executive Officer, Director

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 and Home Improvement, where we have a strong tailwind from the U.S. housing market. But, we also expect some long-term benefits coming from the hurricanes, so therefore, that is probably the category growing fastest.

Now, the other extreme is 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 demands, and then that slows down. 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, how that -- I would say that was overall very similar, so there was really no dramatic shift. The only real difference is that in the Global Auto Care, where we have the A/C business, which is a very strong weather-dependent business, there we saw a decline this year in the category of about 5%, but this was really purely driven by cooler summer weather in our core U.S. market, and there again -- we believe that's not a long-term indication, it's just a short-term weather impact.

Similarly, we had in our Home and Garden division our personal repellant business, where again -- as I mentioned earlier -- we had in 2016 the exceptionally strong demand coming from the Zika virus, whereas now, in '17, both retailers and consumers had pretty much their household equipped with personal repellents, so that category was also down. But again, we believe this was a two-year up and down. So, overall, we believe that also those categories will continue to grow in the low single-digit rates.

Faiza Alwy -- Deutsche Bank -- Director, Analyst

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 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, what adjacent market segments are you targeting -- any more detail that you can provide on those two will be very helpful.

Andreas Rouvé -- President, Chief Executive Officer, Director

Yes, very good. The background is really -- Spectrum Brands, as you know -- back in 2009, we recovered from bankruptcy, and we still had a little bit -- as part of our corporate culture -- of 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 1 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 fruits in '18 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 and Decker brand, more 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 a kind of start-up investment to get it going, and then we are going to reap the benefits in the future.

Faiza Alwy -- Deutsche Bank -- Director, Analyst

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

Douglas Martin -- Chief Financial Officer, Executive Vice President

It's included in the free cash flow guidance.

Faiza Alwy -- Deutsche Bank -- Director, Analyst

Great, thank you.

Operator

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

Bob Labick -- CJS Securities -- President

Good morning. I just wanted to talk a little bit about the shifting retail landscape. 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.

Andreas Rouvé -- President, Chief Executive Officer, Director

Okay. That's a complex question. 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 kinds of options -- it is one of many channels, and if you look at the market, 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 going forward, really, 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 kinds of specifics is going to be key.

Now, if we look at our growth strategies, 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 already developing very well and very fast.

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

Douglas Martin -- Chief Financial Officer, Executive Vice President

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 multichannel, 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.

Bob Labick -- CJS Securities -- President

Okay, fantastic. And then, just following up on that, 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?

Andreas Rouvé -- President, Chief Executive Officer, Director

Again, it depends very much on the category. For instance -- I think Doug mentioned it earlier -- as we are launching Russell Hobbs in the U.K., we are launching it exclusively 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.

Bob Labick -- CJS Securities -- President

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?

Andreas Rouvé -- President, Chief Executive Officer, Director

Unfortunately, we can't have too much detail 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 interests 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.

Bob Labick -- CJS Securities -- President

Great. Thank you very much.

Operator

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

Christine Sinicrope -- Raymond James -- Analyst

Hi, good morning. This is Christine 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.

Douglas Martin -- Chief Financial Officer, Executive Vice President

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.

Christine Sinicrope -- Raymond James -- Analyst

Okay -- not even for fiscal 4Q?

Douglas Martin -- Chief Financial Officer, Executive Vice President

No.

Christine Sinicrope -- Raymond James -- Analyst

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

Andreas Rouvé -- President, Chief Executive Officer, Director

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, we had a decline in the quarter, 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.

Christine Sinicrope -- Raymond James -- Analyst

Okay, great. Thank you so much.

Operator

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

Sam Reid -- Wells Fargo -- Analyst

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 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?

Andreas Rouvé -- President, Chief Executive Officer, Director

Well, I think the most -- the biggest impact we saw this year was really in our two seasonal categories, Home and 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 deliveries on time and in full. And again, this allows the retailer and the manufacturers to take total inventory levels out of the supply chain.

So, we believe that we are at a much healthier level today 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 publicly that they will continue to focus on further inventory reduction, and I think we are well-positioned -- we don't see the big impact coming in the future as we had seen it this year, but there will be some minor twists and tweaks in different categories.

Sam Reid -- Wells Fargo -- Analyst

Got it. That's super helpful. A slightly different question here -- the builder channel. I know you guys have mentioned that as a growth opportunity. When should we see some of the moves that you've made into that channel start to flow through in HHI in 2018?

Douglas Martin -- Chief Financial Officer, Executive Vice President

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

Sam Reid -- Wells Fargo -- Analyst

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

Operator

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

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Hi, guys. This is actually Chris Carey on for Olivia. So, I guess a little bit of a change in language on the businesses that are growing above-category growth are now most, not all. So, 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 businesses where you don't expect them to grow in line with the category or above the category -- how Project Alpha is going to help you do that?

Douglas Martin -- Chief Financial Officer, Executive Vice President

Let me start from 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 were 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 and plan for every one of our businesses to grow faster than their categories every year.

Andreas Rouvé -- President, Chief Executive Officer, Director

And again, I think 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 some nice examples. I mentioned earlier launching Russell Hobbs here in the U.S. to capture higher-price point, different-featured products.

At the same time, we are expanding now with Home and 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 kinds of initiatives where we said yes, we are going to launch into new channels, categories, countries, and we are going to support it, so we have a fast, impactful growth instead of slowly, marginally growing it in a self-funding way.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

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 '17? I'm just trying to get a sense of how to think about that going into fiscal '18. Thank you.

Douglas Martin -- Chief Financial Officer, Executive Vice President

Thank you, Chris. I think some of the drivers in gross margin this year from a reported basis -- which is what I would 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 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 have had 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.

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Okay, thanks for that.

Operator

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

Majid Khan -- Tourbillon Capital Partners -- Principal

Hi, guys. 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 trend 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 at almost an 11% free cash flow yield. It's by far the cheapest stock in the group, and by far the cheapest the stock has been for many years. I think even Energizer is 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 billion yuan of free cash flow, and your entire float is only 2.3 billion. 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 fiscal '18 earning almost $13 of free cash flow per share. 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 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.

Douglas Martin -- Chief Financial Officer, Executive Vice President

Thank you. 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 is 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 assured 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.

Majid Khan -- Tourbillon Capital Partners -- Principal

Fair enough. Thank you, and congratulations again. Good drop.

Operator

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

Jim Chartier -- Monness, Crespi, Hardt -- Analyst

Good morning. Thanks for taking my question. First, I want to touch on the impact of the rawhide recall on the 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 do you expect it to be? And then, net for 2018, does it become a positive swing factor for you this year?

Andreas Rouvé -- President, Chief Executive Officer, Director

Well, the impact 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 a long-term clear, competitive advantage.

Jim Chartier -- Monness, Crespi, Hardt -- Analyst

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

Douglas Martin -- Chief Financial Officer, Executive Vice President

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.

Jim Chartier -- Monness, Crespi, Hardt -- Analyst

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

Douglas Martin -- Chief Financial Officer, Executive Vice President

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.

Jim Chartier -- Monness, Crespi, Hardt -- Analyst

Great. Thanks, and best of luck.

Operator

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

Karru Martinson -- Jefferies -- Senior Vice President

Good morning. Just on the Alpha investments, you talked about Project Ignite possibly offsetting some of those. How should we think about the magnitude of savings that you can get from operational improvements?

Douglas Martin -- Chief Financial Officer, Executive Vice President

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 -- identifying the effectiveness and productivity of our spend, and making sure that we're spending with customers that help drive profitable growth for us, and prioritizing where we spend.

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.

Karru Martinson -- Jefferies -- Senior Vice President

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." As you go into line extensions and innovations, are you looking at a new competitive landscape, or is the goal still to adhere to that core message?

Andreas Rouvé -- President, Chief Executive Officer, Director

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, the point -- 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 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.

Karru Martinson -- Jefferies -- Senior Vice President

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

Andreas Rouvé -- President, Chief Executive Officer, Director

As you have seen with the acquisition of PetMatrix and 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 10x 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 long-term, it's also going to help the company grow organic sales and EBITDA in a very attractive way if you think about return on assets -- those kinds of metrics.

Karru Martinson -- Jefferies -- Senior Vice President

Thank you very much, guys. Appreciate it.

David Prichard -- Vice President, Investor Relations

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 of us here at Spectrum Brands, we want to thank you for participating in our 2017 Fourth Quarter Earnings Call. Have a good day. Thank you.

Operator

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

Duration: 55 minutes

Call participants:

Andreas Rouvé -- President, Chief Executive Officer, Director

Douglas Martin -- Chief Financial Officer, Executive Vice President

David Prichard -- Vice President, Investor Relations

Faiza Alwy -- Deutsche Bank -- Director, Analyst

Bob Labick -- CJS Securities -- President

Christine Sinicrope -- Raymond James -- Analyst

Sam Reid -- Wells Fargo -- Analyst

Chris Carey -- Bank of America Merrill Lynch -- Analyst

Majid Khan -- Tourbillon Capital Partners -- Principal

Jim Chartier -- Monness, Crespi, Hardt -- Analyst

Karru Martinson -- Jefferies -- Senior Vice President

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