Q1 2020 Earnings Call
[music], ladies and gentlemen, thank you for standing by looking to the Q1 2020 spectrum brands holding incorporated earnings conference call.
At this time, all participants' lines aren't listen only mode.
The speakers presentation, there will be a question answer session.
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I'd like to have the conference over to your speaker today, Kevin Kim. Thank you. Please go ahead Sir.
Thank you, Chris Wolking spectrum brands Holdings fiscal 2020, Q1 earnings conference call and webcast I'm, Kevin Chemed divisional VP of Investor Relations and moderator for today's call to help you follow our comments, we placed a slide presentation on the advent calendar page of the Investor Relations section of our website at www.
Got spectrum brands Dot com.
Document will remain there following our call.
Starting with slide to the presentation or Colby Labite, David Moore, Chairman and Chief Executive Officer, Jeremy Smeltser, Chief Financial Officer, and rainy Lewis, our Chief operating officer. After their opening remarks, we will conduct the Q and <unk> session.
Now on our comments today looking our comments today include forward looking statements, including our outlook for fiscal 2020 and beyond. These statements are based upon managements current expectations projections and assumptions and are by nature uncertain actual results may differ materially due to that Rick spectrum brands.
Encourages you to review the risk factors and cautionary statement outlined in our press release dated January Thirtyth 2020, and our most recent SEC filings and spectrum brand holding most recent annual report on Form 10-K , and quarterly reports on pads on Form 10-Q , we see no obligation to update.
Any forward looking statement also please note we will discuss certain non-GAAP financial measures on this call reconciliations on a GAAP basis for these measures are included in todays press release, and 8-K filing which are both available on our website in the Investor Relations section and now let me turn the call over to David Moore.
Hey, good morning, Thanks, Devin and good morning, everybody. Thanks for joining us today for first quarter conference call.
As I stated on her last earnings call. It <unk> fourth quarter of all fiscal 2019, we expected to have a divot in our first quarter performance starting in 2020, and then to regain momentum and the balance of the year.
And this quarter, we just reported organic sales were essentially flat with our adjusted EBITDA down 11.4%.
The first quarter decline in adjusted EBITDA was inline with our expectations as tariffs exceeded the ramp up or productivity improvements, we expect to resume sales growth this quarter and additionally, our global productivity improvement plan is expected to catch up to our tariff headwinds on the top.
Blind, we did experience organic growth in our home and personal care divisions and in pet.
And while timing issues at our home and garden in H.I. segments drove was flat overall, we continue to expect net sales adjusted EBITDA and free cash flow growth in 2020.
What could have you turn to slide seven.
We are executing on our strategic plan and delivering full year revenue growth is a top priority for each of our teams.
Example, in our home and personal care Division, we had an outstanding quarter.
This quarter or appliance unit reported its first quarterly growth year over year, we're particularly pleased to see this positive inflection point in our appliance business as it fuels or confidence as a management team the investments that we're making to streamline our businesses launch new products.
That's been innovation R&D and marketing are beginning to bear fruit.
We experienced top and bottom line growth from home and personal care demonstrating tremendous progress from the new leadership team there led by Dave Albert.
Additionally, this quarter represents the fifth consecutive quarter topline growth and our global Pet care unit. This was driven by a combination of continued growth and our dog chews and treats category, but more importantly continued innovation and market share gains.
The court. This quarter also represented the third consecutive quarter, a bottom line growth for our global pet care business.
We continue to make progress on a number French this quarter first we entered into an agreement for the sale of our dog and Cat food manufacturing assets include board and in the Netherlands for price of approximately $33 million you us.
A spectrum will continue to operate the commercial dog and cat food assets with the arms and you can new brands in Europe for the time being.
But this action represents progress against our plan in global pair cure to exit noncore assets and focus on our core brands.
Secondly, we continue to reward shareholders by executing 125 million dollar accelerated share repurchase program and we did repurchased 1.3 million shares of our common stock for approximately $81 million through open market repurchases during the quarter.
Third we made significant progress on our plans to generate over $100 million run rate savings from our global productivity improvement plan over the next 15 to 18 months much of these savings will be redirected to reinvest in our base businesses and to drive future growth as well as offset additional 10.
Of cost were experiencing in fiscal 2020.
There is much more work to be done this fiscal year as we execute on our productivity improvement plans and we embrace some work customer driven mindset, but I'm confident that our best days are ahead of US again, as we work to deliver significant long term value creation and produce sustainable growth going forward.
Our spectrum 2020, guiding principles remain vision and our vision is to be a strong innovator of great products marketed with excellence and supported by consumer insights.
Clarity, which means we're continuing to simplify our businesses by streamlining our go to market strategies, and becoming a much more productive and efficient company.
And focus.
Focuses our relentless focus on our best in class customer service attributes. This is our pathway to a consumer driven mindset accepting nothing but outstanding quality and service, while increasing innovation marketing investments except for behind our brands. These actions are evidenced.
In our home and personal care business. This quarter, we are driving the culture of greater accountability much quicker decision, making with an experienced an energized leadership team that's been refreshed with new talent and focused on operational excellence as we position our company for improved sales earnings and sustainable free cash flow growth.
Yeah.
Oh, you'll hear more from Jeremy on the financials and Randy will give you an update and some additional business insights from the different business units, let me turn the call over to Jeremy.
Thanks, David Good morning, everyone. If you will turn to slide nine I will start with a review of Q1 results from continuing operations beginning with net sales.
Net sales decreased 1%, excluding the impact of 6.3 million of unfavorable foreign exchange organic net sales were essentially flat with growth in HPC and global pet care offset by declines at home and garden and nature Jive.
Gross profit fell 12% gross margin of 30.9% decreased 380 basis points is higher tariff costs timing of capitalized manufacturing variances and GE Pip restructuring costs were partially offset by productivity and positive pricing.
Sta expense of 226.5 million decreased 11.1% at 26% of net sales this year compared to 29% a year ago, driven by higher noncash depreciation and amortization charges recorded last year in HPC due to the reclass back into continuing operations in the period.
The operating loss was driven by the recognition of a loss on the asset sale and impairment charges in global pet care associated with the keyboard and dog and cat food manufacturing operations and higher GE Pip restructuring costs.
Partially offset by lower depreciation and amortization.
Operating income was also negatively impacted this quarter by $8.5 million of higher stock compensation.
More normalized long term incentive compensation compared to a timing delay last year.
This will normalize on an annual basis.
Adjusted EBITDA decreased 11.4% growth in global pet care and home and personal care were offset by declines in hardware and home improvement and home and garden.
Adjusted EBITDA margin declined 140 basis points, driven primarily by higher tariff costs.
Timing of capitalize manufacturing variances and stranded costs, partially offset by productivity and positive pricing.
If we turn to slide 10, if you could see Q1 interest expense from continuing operations of $34.8 billion decreased $22.2 million driven by our lower debt levels.
Cash taxes during the quarter of 14.5 million were 4.5 million higher than last year, driven by a tax audit settlement that was paid in the quarter.
Depreciation and amortization continuing operations, a $41.7 million decreased from $66 million last year, primarily due to the impact of HPC depreciation and amortization of prior year that I mentioned earlier.
Separately the share based compensation increased from $6 million last year to 15 million. This year again as I mentioned earlier, this will normalize and a four year basis.
Cash payments for transaction related charges were 4.6 million down from 20 million last year.
Restructuring and related charges for Q1, deep Pip and including discontinued operations were $38.6 million versus 9.9 million last year.
The higher cash spend was driven solely by GE, though.
Moving to the balance sheet, we completed Q1, and a strong liquidity position, including $678 million available on our 800 million dollar cash flow revolver at a cash balance of 142 million.
Debt outstanding was 2.4 billion down 50% from 4.8 billion at the same time last year.
As compared to the prior year quarter first quarter, ending inventory was lower by $95 million and our operating teams continue to drive more discipline and improved process into our working capital management enabled by our continued investments in capacity and automation.
In addition in January this year, we paid the previously disclosed payment the energizer in connection with the divestiture Arda business.
In addition, we continue to hold 5.3 million shares and Energizer currently valued at approximately $250 million.
Capex in the quarter was $18.7 million versus 13, and a half million last year.
Turning to slide 11, now in our 2020 guidance, we are reaffirming our 2020 guidance for net sales adjusted EBITDA and adjusted free cash flow.
Still expect low single digit reported net sales growth with foreign exchange expected to have a slightly negative impact based on current rates.
Adjusted EBITDA is still expected to be between 570 and $590 million.
This guidance includes cheap it benefits and the impact of tariffs that are currently in place.
Fiscal 2020, adjusted free cash flow from continuing operations still expected to be between 240 $260 million.
Depreciation and amortization is expected to be between 145 in $150 million, excluding stock based compensation of approximately 55 to 60 million relatively consistent with last year.
Full year interest expense is expected to be between 140 and $150 million, including approximately 10 million of noncash items.
Cash interest payments are expected to be between 130 and 140 million.
Restructuring and transaction related cash spending is expected to be between 90 and $100 million. Capex also is expected in the $90 million to $100 million range.
Cash taxes are still expected to be between 45 and $55 million and we do not anticipate being a significant U.S. federal cash tax payer during fiscal 2020, as we continue to use net operating loss carry forwards.
We started this year with approximately $800 million of usable federal and a wells.
And for adjusted EPS, we continue to use a tax rate of 25% including state taxes.
Now I'll turn it over to Randy for more detailed look at our business unit performance.
Thanks, Jeremy Good morning, everyone. Thank you all for joining us today.
This point I'll walk through the results of each of our business units. So turning to slide 13, and hardware and home improvement first quarter reported net sales organic sales decreased 2.4 in 2.5% respectively. The lower net sales were driven by residential security and builders' hardware categories, partially offset.
By growth in implementing category.
Decline in residential security was driven by lower build their volume and builders' hardware was driven by timing of orders from two large customers.
Adjusted EBITDA decreased 23% driven by incremental tariff costs and lower manufacturing volumes in the core.
Actually offset by higher pricing lower distribution expenses.
We remain excited about the outlook in this category the electronic deadbolt smart locks in 2020, given the relatively low and fast growing U.S. residential adoption rates as an example of this earlier this month quickset team introduce the Halo touch Wi Fi Smartblock at the consumer electronics show in Las Vegas further innovating.
Halo smart locks, but providing homeowners access to their homes via fingerprint.
This is the first in the industry to have this technology.
We're very pleased that this innovation was given a best home Tech product award by several different outlets.
In the space, we continue to use our proprietary cloud based platform and new mobile application as a competitive advantage for launching new product introductions in this space.
Additionally, our strategy in the plumbing segment is expected to deliver significant new wins in this segment and we look forward updating you on that in our next quarter.
No.
The Glip believe our long term growth will be driven by robust electronics product roadmap and the new introductions. Our teams are bringing to market. This year.
[noise] not home and personal care, which is slide 14.
They're very happy to report that the first quarter reported net sales increased 1.5%.
Any net sales grew a solid 3.2% adjusted EBITDA grew 4%.
Net sales were driven by growth in Europe , and both personal care and small appliances and net sales in the U.S. declined slightly compared to prior year driven by the performance in department stores and specialty channels.
As David alluded to earlier these results demonstrate remarkable progress in our road to recovery the new clients leadership team rebalancing its cost structure, the objective of accelerating profitable growth for our trusted brands to compelling and innovative products.
Our consumer driven mindset in Europe continues to pay dividends with topline growth.
For example over the last year strong growth from new product innovation in Remington men's grooming as far outpacing category growth rates. Additionally, Russell Hobbs has achieved significant share gains, especially in the UK home market.
There is much more to come in the appliance category. We believe this renewed focus on supporting our strategic brands and investing behind fewer bigger better products.
Renewed growth in 2020 and beyond.
Moving to global Pet care, which is slide 15.
First quarter reporting net sales increased 0.5% and adjusted EBITDA increased by 8.2%.
Putting currency.
Sales grew 1.1% in the quarter.
Higher net sales were attributed to continued growth in the U.S. companion animal segment as we overcome a decline in U.S. declines in Europe sales grew both in aquatic in companion animal segments.
We experienced continued growth in companion animal sales in Q1 in the U.S., Despite lapping a double digit increase in the market from the prior year.
Our pet team remains committed to exiting non core assets and activities invest more time and resources into our targeted top growth brands as David highlighted earlier, we demonstrated his commitment by exiting our rawhide manufacturing facilities in Latin America, and agreed to exit our cohort and dog and cat food operations in the Netherlands.
Given positive category growth protection projections for increasing participation rates and passionate pet owners. We continued to be pleased with our innovative product road map and strategy for growth in pet business.
During the holiday season smartphones was listed as a top seller award winner by our largest online retailers.
I'll choose and treats growth in Canada, and Latin America benefited from listings for good and fund brand and smart phones brands several major retailers.
We're also encouraged by our continued partnership development in the US pet specialty channel for multiple new product listings are expected to start shipping later this year.
Turning to home and garden, which is slide 16.
First quarter reported net sales decreased 13.9% adjusted EBITDA decreased $6.4 million, while Q1 revenue and EBITDA were below prior year keep in mind in Q1 represents the smallest quarter of yours.
Sales were impacted by higher than normal inventories of customers as a result unfavorable weather in 2019, however, as we exit the quarter. We believe our customers have a much improved inventory position as Pos is.
Very positive beginning of Q2.
In the quarter. There was also impacted by the timing of manufacturing costs due to a planned later seasonal inventory build.
As well as higher advertising investments as we committed to.
In the last 12 months, we continue to grow market share in all three business segments of home and garden.
Now, let's household insect and outdoor controls.
Going forward, we continued to be encouraged by our seasonal planning with our retail customers.
Consumer promotion plans and the weather outlook for this spring.
We are confident that are solid brand equities investment in product development marketing will drive growth.
Turning to 17.
We also want to provide.
Okay and update.
[noise] excuse me, we also want to provide an update on well productivity improvement plan.
This program continues to be our most important strategic initiative for delivering sustainable organic growth.
As we focus on quicker more globally line decision, making within each of our businesses driving more focused and relevant product innovation enhanced consumer analytics 90 processed.
Since our last call we have successfully closed Latin American rawhide facilities in global Pet care and the late November entered into the sale agreement. We discussed about the two one dog and cat food manufacturing operations. We have continued to lock in significant savings from New center led sourcing processes.
We continue to expect the gross annualized savings from the various work streams of GE pets to deliver at least $100 million annually in that these savings will be at full run rate in the next 15 to 18 months.
Much of this savings will be reinvested back into growth initiatives and consumer insights R&D and marketing across each of the business.
One of the most exciting developments in the quarter was the launching of our center led commercial operations team.
The formation of this team will enable a centralized approach the consumer insights digital asset development Commerce operation revenue and profit management for each of the business units to marry their individual brand product and channel strategies.
The script is being led by one of our strongest internal leaders will be a major step forward in how we efficiently harvest analyzed and deploy data to drive long term organic growth.
Forward to continuing to provide more updates in details on our very exciting jeep that benefits on our future calls.
Now back to David.
Thanks, so much Randy.
Thanks, Thanks, Randy Thanks, Jeremy Kevin Thanks, everybody for joining us this morning on the call.
With our first quarter does a call at the first quarter debit behind us. Our we're pleased to begin realizing additional benefits from a global productivity improvement programs, which randy's described in detail and returning our company to growth in the second quarter and for the balance of this fiscal year I'd like to thank all of our teams the progress in Reeves.
Utilizing our company and driving change for future success, we do have a strong balance sheet and healthy liquidity and we are now setting our sights on accelerated growth. We also continue to believe that our share price continues to be materially undervalued and we will repurchase our stock opportunistically from time to time team.
We are proud that we were able to deliver on our financial commitments 29 team is only strengthened our resolve to deliver our 2020 financial guidance of low single digit sales growth adjusted EBITDA of $570 million to $590 million and adjusted free cash flow of 240 of the $260 million.
Going forward, we expect to drive material further growth in our free cash flow generation from their alternative dr., Kevin to take any of your questions.
Thanks, David Chris lets just jump right into Q in it.
And as a reminder to ask questions, we need to press star one on your touched on the phone and to withdraw your question. Please press the pound Keith.
Please stand by what we can probably 20 roster.
And our first question comes from the line of a Bob Labick CJS Securities. Your line is now open.
Hi, good morning, Thanks for taking my questions.
Bob what about height. So on prior calls we've talked about.
Part of your growth and unexpected reacceleration of growth is driven by consumer centric new products could you alluded to a little bit on the call already but could you talk more about the pipeline of new products and maybe the new product introduced introduction capabilities and process.
Now versus a year or two ago, and you know where that's going to go.
I'll, let Randy and alone.
Yes, good morning, Bob So that's.
Major component of RG Pip.
We talk about Jeep that when we talk a lot of by being kind of savings front loaded, but really behind the scenes the heavy lifting using redesigning that innovation process and we're working with some a world class experts to help guide us through that it starts with this commercial operations team that I discussed in the prepared remarks were.
We tend to want to centralize all of the generalized functions of scraping and harvesting data of what's happening within categories macro and micro internal external.
Vending that back into a disciplined innovation process.
Within each of the businesses, it's aligned with the brand strategies the channels in the products and so those new product development processes are embedded in each of the business units and they tend to be.
At a little different stages of development, but as an example, HHR by being first to market with a fingerprint wife by lock that we continue to be able to hang on our own security cloud. It's just the kind of the tip of the iceberg of being able to launch a whole line.
Products in that space, when we look at our appliance business very happy with the progress we've made there in the last year and it's not been.
Short term minded from the very beginning David was committed to revamping that business with a focus for growth and we could have turned around bottom line numbers much quicker if we weren't committed to the long term and so we've got a great Npis engine, there and we're doing a lot there to focus that on fewer better stronger we've got a number of.
New and exciting products coming out in that space within the next couple of quarters, we'll be launching a George foreman smokeless contact real in the U.S. that will start shipping later this quarter or an exciting new products and Remington wet style blackened Decker airfreight, toaster ovens et cetera, and so that's evidenced there.
Little bit longer timeline in home and garden, but you'll start seeing products that will be launching out of that process. Later this year.
Yeah, absolutely no that's super color I really appreciate that and then I don't know if it's in the earnings slide that could I don't think put in recent slide decks, you've discussed that 15 of your brands make up about 80% of your sales you've also talked about divesting non core businesses, you talk a little bit about.
The other is it other brands or where are the portfolio optimization stands might there be other small sales like the European divestiture of dog and cat food mentioned today or where's that process.
Look I think we're we've been pretty open about it we want to we want to feed the winners and starved losers and.
But I think look I think most of the streamlining is done I mean quite frankly, I mean, our global footprint.
In pet and again, thanks to that team for bearing down or.
Probably four facilities down from 10 and will be will be actually growing our sales pretty nicely resuming pretty good growth during the second quarter on pet.
Much better than what you saw this quarter of so again everything is about productivity everything is about getting greater yield and it's the designing.
It is what I'm really excited about everything here is built on getting data to make sure that as we allocate capital internally, we're doing it much more efficiently and getting a higher return on those dollars. So look.
Yeah, There's no question things like coordinated little bit disrupting and they cause some noise in the quarter and that it's we're still not done, but I think we're down to two to little little pieces of it and so yes that that business you know, it's nice to get 33 million Bucks on an asset.
The quite frankly was dormant and we we weren't making a profit on it and we've got a good partner there to take that us it over and give our people employment and.
Quite frankly, there will be a synergistic partner there.
But you know look we most of the teams have already.
Jump on board with the whole Montrose.
Asian clarity focus and I think you know everybody knows who they what they stand for where theyre going and what their hero brands are and what to support this point.
You have to Randy you disagree without or no I think thats exactly right as we've transitioned from a more and more and more strategy, which led to.
A lack of global prioritization, we focus very heavily on realigning the businesses on global brand strategies and so Bob there's not a lot of large assets that we're talking about but we have literally dozens of smaller brands and product categories that have kind of emerged around the globe and they just become distracting on.
Resources, and so a lot of effort going into making sure that we're focusing within each of our businesses on those strategic brands and those brands will get the investment they'll get the npis they'll get the reached the top talent and that's where a lot of the growth is going to come from.
Great that's super Thank you so much.
Thanks, Bob.
Thank you and our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is an open.
Okay, great. Thank you very much I'm, just not a keen on your comments about the returned to growth in the second quarter.
You know what particular is driving that you know, what particularly excited about and give us a little more color there. Thanks.
So close the second quarter, I mean, I think as we talked about in appliances and Pat we expect that growth to continue as we mentioned on our of our fourth quarter and guidance call, we expected growth and in all four businesses topline and EBITDA I think randy's talked about new products coming down the pipeline, which will help accelerate.
That growth from first quarter on through the rest of year.
And then particularly in Q2, you know some of the challenges we had around the seasonal side of the home and garden business, we expect to to improve sequentially.
Yeah.
Yes.
Uh huh.
Got it.
I was just an had a little bit of color for the team as far as the home and garden business for the season.
While we are bullish on the year and we've got good weather forecast for the spring.
It is important to understand that we're seeing a different strategic approach to the strapped to the category from some of our top retailers actually seeing a heightened strategic focus that is exciting to us.
But the timing is going to be different many retailers really loaded up from last year and so the pacing of revenue over the course of that business. This year is going to change to be a little bit more backend loaded than than what it was before but overall jeremys right. It's the timing of of new product introductions in each of the business.
Okay and then just one other question on the tariff side, what should we expect sort of for the remainder of the year and then just sometimes with the impact would be.
Given the kind of all the moving parts Jasmine gone away.
Thanks.
Look I think I think we've disclosed in the past you know the headwinds we're facing look obviously phase one I think it looked a lot of people expected to be massively beneficial we would tell you it's slightly beneficial but I mean, the my main take away on phase. One is we're not getting hit in the face anymore, we will.
Pick up a little bit of incremental benefit there, but it's immaterial and so the best thing I think that's occurred is there some there's some clarity and certainty in the marketplace, where our retail customers. You know that you could see stuff where people would get nervous about you know terrace get more out of control and do some pre buys and.
Now I think with certainty with phase one I think are customers are resuming a more normal trading patterns and and that also gives us fuel for our confidence in Q2 growth.
Okay. Thank you very much.
Thanks Ian.
Thank you and our next question comes from the line of Olivia Tong with Bank of America. Your line is now open.
Thanks, Good morning.
Talk a little bit more about sales because you guys have been pretty.
Yeah.
Quite a bit lower than what the market.
So.
And your expectations.
As expected.
Just on specifically on 80 tie for a minute.
That was particularly surprising given the strength in housing data, both new role models et cetera. So you mentioned a few things on the timing.
How those orders that you expected.
That's it. Thank you expect ended December quarter now come through and then if you could talk about that decline until October .
Yes, good morning, and where the so with regards to the quarter.
We talked about home and garden and being a little bit of timing and so.
As we got closer to the season, we're seeing that several large retailers are taking a more measured approach to the feed and and therefore some of the things we might have expected to ship at the end of December are coming in in Q2 with regards to H. I was kind of mainly three areas where.
We had a hit with two large customers, who took inventory out of their system over the course of the quarter, we believe related to potentially terrifying patterns as David alluded to before.
We did have a material black Friday event that we had last year in the quarter Didnt anniversary this year.
And then we were in the final quarter of lapping too.
Material losses of low margin items from a year ago. So that's the main drivers of HIV and we're continuing to watch it closely the category as you said the metrics the market is pretty solid and we expect that to turn back to growth and to deliver good numbers for the year.
Got it.
Residential lot.
Obviously business.
Quite a bit of innovation.
And.
<unk>.
The business that you lost there I would assume is lower margin relative to WTI average.
Yes, it was lower margin and it was older technology and it was in.
Where we were not willing to go chase pricing.
And was kinda related way back to outcomes from the challenges we had in supply chain execution 18 months ago.
Got it and then if I can follow up on market share positions across the portfolio because it seems like that's now stabilizing but.
Some losses in Gi at least you underperformed your closest competitors have you thought.
Going to drive that improvement there because you mentioned the retailer excitement around but also pushing out for which seems a bit at odds with each other.
So if you're.
Comparing our home and garden business too.
Large competitor, there's a big gap in the line up there and so we're.
When you look at our product categories versus another competitor there there's there's about a.
11, 12% overlap of revenue.
So we don't compete in many of the categories and then the trend lines tend to diverged.
So as we look at the categories that we compete and being a insect repellants indoor insecticides and outdoor controls our data would show that we've taken share, especially at the home centers in each of those segments over the last 12 months.
And as far as a timing goes it's not super concerning to US there as long as of inventory is available and we've got the capabilities. We last year, we were able to meet expectations of our retailers when they accelerated purchases and it was not a problem. So as they delay those orders I'm still not worried about that.
Got it thank you.
Thanks alleviate some of it.
Thank you and our next question comes from the line of season Allied with Deutsche Bank. Your line is now open.
Hi, good morning.
A couple of questions from me just first on H. I just wanted to go back on the timing of orders I don't think you quantified the impact from that so I'd love to hear you know how much. The box was just on the on the timing of orders on the boundaries hardware piece.
And then I know that I believe builders' hardware is where you might be competitively disadvantaged due to tariff because you'd consolidated your manufacturing in China. So I wonder if there's been a little bit of impact from that and you know is there sort of a pricing component there and are you seeing sort of.
You know any volume impact from that pricing.
On builders' hardware, specifically, we're taking material auctions internally to get more efficient there to lower cost structure and to improve our profitability materially in the current fiscal year.
And also nature, Utah is weird stuff to Retool reserve were we are resuming the growth in Q2, and we expect a very good finish for hardware for the fall through the year I think I'd like to go back to the home and garden piece of it.
Yeah, I was 46 million Bucks revenue I believe.
You know just again I know, we live in a short term world, but every other quarter and home and garden is typically 150 or 200 million dollar a year, so wouldn't [laughter] wouldn't get overly concerned about home and garden.
No I completely agree I think home and garden is pretty irrelevant for this quarter I was just sounds more concerned about H.I. in.
Hi, My piece, but I also I was wondering if I could give more color on the pet segment, because you know you've done really well and the treats side of that.
Yes, but comps do get a lot tougher. So how are you thinking about girls for that segment.
For the remainder of the yard and then I just want to understand the mechanics of the ceiling. These facilities I mean, it sounds like so you're keeping those brands are those businesses aren't really going away, you're just going to be outsourcing the manufacturing.
That's really what's happening.
Yeah. So.
Let me, let me try and take those questions maybe I'll do in reverse order so with regards to be that facility.
The mechanics of it is the fact that we are working with the synergistic partner, who will take over the operations. This will be one of many facilities that they operate in the European continent, and so they bring a readymade understanding about how to operate with high degrees of efficiency and cost improvements or they will be able to instantly.
Add capacity to an underutilized facility, thus improving the absorption and freeing us to focus on the commercial aspects and the brand management will continue to look for strategic options for the remainder of that business, but overall, it's going to be a net positive for us from an operation up again, freeing up there is real.
Sources.
With regards to you know the future comps in Pat where we're feeling good about that because one of the things Bob asked the question earlier about the in P.I. process and Pat is where that cycle is the shortest and consequently, it's where the fruit of our work a year ago.
So 18 months ago has really started hitting the market and has been evidenced since last summer. So we continue to see a higher vitality rate I mentioned in prepared remarks that we are returning to positive relationship building with U.S. pet specialty and for anyone who's followed us for a while you know that's a major.
<unk> advantage for us.
And then innovation coming in the aquatic space, we had a major U.S. retailer, who decided to exit live fish.
It's having an impact on the category, but we're actually being able to counterbalance that much better than we anticipated and our glow fish business is a key piece of that bringing able to being able to bring innovation into a somewhat stagnant category is really exciting and so we continue to launch new species in new colors.
And if you haven't heard a we'll be launching the world's first ever.
Glow beta later this quarter as we've received FDA approval three weeks ago and so later in this quarter, we will be launching with three species in the first color and so that's driving a lot of excitement in those spaces. I mean need these are fish that will retail for up to $29 each.
And there really exciting and they they target a whole new category were about a fish can be kept singularly in a small desktop tank and it really broadens the appeal to the to the entry point of that category. So it's those types of things that have us I'm feeling confident about continued pepper.
Understood. Thank you.
Thank you and our next question comes from the line of Jim Chartier month with Monness Crespi aren't your line is now.
Hi, Thanks for taking my question just.
Just want to talk about somebody the marketing investment you guys are made over the last 18 months or any color you can give us there on what kind of returns you're seeing are you seeing the lift in the products you're investing behind and then specifically on Manchester United You know is that partnership fully activated and what are you seeing there. Thanks.
Thanks, Jim So I don't think we're going to go into the detailed specifics of the our lives by brand investments.
But overall, we are measuring the ramp up of those investments to be more focused and more aligned with the brand strategies that I discussed earlier.
More aligned globally, and so one of the aspects of the kinds of good commercial operations team that we announced this pass or couple of weeks is exactly that is putting additional external resources around ensuring that we've got a visibility to those are realizing we can make better faster decision.
In that space.
With regards to Manchester, United fully executed and seeing really positive impacts there I don't have those data points with me and funding, but I don't goes it was a growth rate.
Remington Europe .
Last quarter.
Well have to find that number. It's it's buried in my deck here, but you can definitely see it in Remington both from the standpoint in Europe , but also in Asia Pacific also.
Great and then on the Smart locks you guys have highlighted your in house cloud platform.
Do they do your competitors have hub in house platforms themselves and I guess, what kind of advantage that does your platform provide versus the rest of the industry.
Well, we believe already our platform is unique against within the major providers and what is really.
Important about this is back before smart locks you know the key was controlling the key and the the lock and the key combination was the key to that category as we move to smart locks, it's all about controlling the credentialing of whatever your use.
Turning to replace the key in that interface, both from a standpoint of technology, the liability speed and security so being on our own cloud greatly improves our overall security.
Product it greatly improves the operation consumer experience because everything is done locally so much faster reaction times and on top of that don't have to rely on point a home hub network you can connect directly into your wife I system. So it takes an additional step.
An additional costs and additional.
Unreliable step out of the process in smart home development.
I thought the.
Remington thing I'd asked the team, but I believe we grew 9%.
Remington in Europe , and that's based on fully loaded you know Manchester United programs and so you know I just wanted to give you some color what we don't want to go into our laws and everything but.
You know the teams are continuing to do what's hard right. What's hard is when you have a quarter like this for home and Garden, where you know you guys are clearly the Brexit the top lines down we keep spending on advertising, we keep building those brands and we're doing what is right where the base business as long term and so.
Again like I'm personally thrilled that after nine months, we now have the topline and bottom lines growing our appliance units and it's up to us to maintain the discipline no matter what the quarterly headwind is the tariff headwind that we keep investing for growth.
And that's despite the category over in Europe , being being down 1.3%, so were swimming upstream pretty fast.
Great Thanks to the color.
Thank you and our next question comes from the line of William Ruder with Bank of America. Your line is now open.
Good morning, I know most of the tariff.
Are you guys were list three issues, but given that the list for his then.
Pushed off and eliminated is the 80 to 85 million of incremental tariff still the right number or should it be lower than that.
I think you still have a good ballpark I think you know net net we probably have a couple million dollar small. So you know we got a small benefit you know to 3 million Bucks something like that that's what we want to disclose at the store.
Okay, and then I guess in terms of price increases that you implemented. This year do you have a sense for what percentage of that 80 85, you may have pushed through in price at this point.
Yes, so when I won't go ended specifics, but we did get well over 50% of the tariff cost impacts in pricing, but that vary dramatically by business and by category and by channel.
Depending upon a number of factors as you can imagine so it was roughly maybe 60% across the portfolio, but if there was a widespread.
That's useful and then just lastly from me when you last updated a shirt your leverage target was three and a half times given the rapid share repurchases you guys are a little bit above that right. Now I guess do you continue to have that is your target and I guess, how should we think about that in the context of share repurchases going forward.
Yeah here. So you should think about it three NAFTA four times leverage is where I want to steer the ship.
The company is materially undervalued at the moment.
Happy to take leverage above that for a short period of time.
Because we're running the business for the long term.
And we are staring toward a seven dollar for sure free cash flow business in 2021.
And so what's your is trading at these multiples we will be buying stock.
Sounds good that's all from me. Thank you.
Thank you.
Our next question comes from a line of Carla Casella off with the JB JP Morgan. Your line is now open.
Hi, just one follow line on the tariffs I mean, they even talked about mitigation and coming to bear back half of the year, how much of that is moving the sourcing and pro forma by the end of this year, where do you expect to be interim here amount of good percentage of goods Harvey when I look at it sourced from China.
Okay, I think our appliance unit remains worst of out of Asia, China, We are making some changes the footprints in other parts of the businesses to become less reliant on China and to push things into neighboring countries.
Don't want to go into specifics on that yet.
But yeah, absolutely. We are we continue to move the supply chain around two to benefit the company and.
We'll continue to do so but look I think what were work, but we want to hopefully get across to you guys. Today is that weve. The divot in Q1 was expected from Q4, we've basically taken the pain and we expect productivity to no catch that up in Q2.
And then going forward you know we're hoping.
To be through with this old discussion on tariff and get back to.
Materially growing the business and also reinvesting in a much healthier manner to propel the topline.
Okay, Great and then just one more on he talked about a couple of plants and potentially one closing in on potential are there other opportunities there and on the flip side, you're talking about investing in the business. If some of that on any of the additional capex will need for plant investment.
Beyond kind of what you tied to this year are you in a good spot. After after you complete the press process you're now.
My answers as we're in a good spot, but I'll defer to Randy.
Just a little color Carla we had for manufacturing locations throughout Latin American It produced dog chews and treats those are the for that we announced that we have closed in the course of the core and then also the manufacturing facility in the Netherlands, which we would divest there.
There may be other changes in the future, but not significantly more and we are in a good spot with our manufacturing footprint and so we will continue to use kind of the run rate maybe less in total and capex going forward to drive efficiencies and automation, but you should not be thinking that there.
There's a big home in the Capex to to adjust to this this is that's not connected.
Great. Thank you so much.
Thank you and our last question comes from a line of Karru Martinson with Jefferies. Your line is now.
Good morning, just on the Chinese virus that.
The headlines is that affecting any of your production capabilities and what's the impact there.
We are definitely taking less flights to the mainland.
But look our contract manufacturers offered are there you know its potential we didn't get like week delay on some of the shipments coming into the a the L.A. ports, but we don't expect any material interruptions.
Okay, and then when you look at your stock price versus acquisitions out there.
Well that you have the right footprint or other bolt ons that you would like tied or is it just that stock prices too compelling at this point.
I can't find anything to buy cheaper than my own stock.
Okay.
Just a clarification one is the globe data come out my sons and the market. After his after front until there is other [laughter]. Okay. I think you should be looking at U.S. pet specialty in the latter part of March.
We'd be glad to send to them so.
I appreciate it.
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Thank you.
Thank you and this concludes today's question and answer session. We're now let's turn the call back to Kevin Kim for any closing remarks.
Thank you, David Jeremy and Randy on behalf of spectrum brands. Thanks for your participation.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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