Q2 2020 Earnings Call
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Hold your conference call will begin momentarily.
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Gentlemen, thank you for standing by and welcome to the Q2 2020 spectrum brands Holdings Inc. earnings Conference call at this time, all participants on to listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any for assistance. Please press star zero.
I'd now like to hand, the conference over to Speaker today, the Kevin Campbell de VP of Investor Relations. Thank you. Please go ahead Sir.
Thank you Dylan welcome to spectrum brands Holdings fiscal 2020, Q2 earnings conference call and webcast and Kevin can see VP of Investor Relations in moderator for today's call to help you follow our comments, we have placed a slide presentation on the event calendar page in the Investor Relations section of our website at www.
Got spectrum brands Dot Com. This document will remain there following our call.
Starting with slide two of the presentation, our call will be led by David Moore, Chairman and Chief Executive Officer, Jeremy Smeltser, Chief Financial Officer, and Randy Lewis Chief operating officer. After their opening remarks, we will conduct acumen a session.
Turning to slide three and four our comments today include forward looking statements, which are based upon managements current expectations projections and assumption and are by nature uncertain. Actual results may differ materially due to that risk spectrum brands encourages you to review the risk factors and cautionary.
Statements outlined in our press release dated today April Thirtyth 2020, and our most recent SEC filings and annual report on form 10-K, and quarterly reports on form 10-Q, we assume no obligation to update any forward looking statement.
Also please note we will discuss certain non-GAAP financial measures in 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 now, let me turn the call over to David Moore.
Hey, Thank you Kevin.
Good morning, everybody.
Appreciate everybody for joining us this morning.
I certainly hope this call Barnes you, all well say fraud during these times.
Before we start the call it's really important to me.
It's very hard for me to convey over over an earnings conference call the gratitude I feel.
Toward all of our employees I really thought it would be remiss not to say a huge thanks.
Everybody.
In spectrum brands, all of our employees and associates globally, Oh, I'm extremely proud of the amazing way the spectrum brands families come together and taken steps to protect not only our people are company, but also to serve our retail customers consumers and our communities quite frankly around the globe.
I'm extremely proud of the response the proactive steps in the collaboration this team called spectrum brands is demonstrated.
We have a we have acted perhaps.
More United more cohesive.
Teen than we ever had before.
I'm, just I'm thrilled to see evidence of servant leadership, and empowering and encouraging inspiring our teams are honestly in the U.S. Europe the world over.
It really big Thank you for me from the bottom of my heart to all of our employee associates and partners. Its spectrum brands are I couldn't be more proud Ah. Thank you.
Now to turn to the through the quarter.
You know it's spectrum brands, we're in an extremely fortunate position, we are not only a diversified with four different business units, but all of our four operating companies had been deemed essential during this time. We're open for business. We are producing we're selling to our customers the majority of our.
Customers also have been deemed essential in this time crisis.
So all four of our business units frankly revolving center around the home in fact, if you look at the names of our four business units three of them have the name holding it and I'm thinking about in home to the pet care Division.
They are they not only to have been coming together as I talked about my earlier remarks, but we've been they've been really helping our fellow citizens through the crisis or they felt people cook their meals, you know with our blocking decker and George Foreman appliances in the kitchen or taking care of and enjoying their pets, whether it's a dream bones smart.
Loans, Nature's miracle et cetera, there securing their homes personal residences and businesses with our quickset lock some hardware Baldwin wiser up in Canada, they're running their yards, we use with our structure side liner products and their protecting your family homes from insects would cutter repel.
To name a few.
I believe that is this realization we are actually serving a much greater purpose here that is motivating all of our employees to come together and the way we have over the past six weeks and demonstrate our vision of having a team that is really empowered and inspired to perform.
Our second quarter results are.
They reflect very strong top and bottom line numbers. So that's just the fact organic growth was over 4% in the quarter.
Operating income growth exceeded 62% and our adjusted EBITDA growth of over 21% is impressive to say the least.
It is important to recognize this growth was driven by strong results throughout the quarter.
Our results also include a small operating benefit to the operating profit you, but a line of eight to 8.4 million in our HHR segment and that relates to a retrospective turf exclusion the Jeremy will cover more in his in his section a little bit more detail.
Let me turn real quick to the balance sheet.
Yeah, as we entered marching in the crisis became a lot more real and close to home. Our response to cope with 19 or accelerated we moved very quickly to increase the amount of cash that we had on our balance sheet strengthen our liquidity, we drew down on our 800 million dollar revolver and we ended the call.
With a $458 million of cash in are checking account.
Since the ended the quarter. We've also added an additional 90 million dollar traunch door revolving credit facilities and that currently remains undrawn.
During the quarter. We also closed the sale of our European Dog and Cat food manufacturing assets for over 30 million U.S. cash we did close our Cambodia Rawhide manufacturing facility and we made a small tuck in acquisition of Omega C, which is another fish food business and complements our touch your portfolio and.
We've added that obviously to our global Tech pet care.
Portfolio of aquatic brands all of these accomplishments further demonstrates the importance of strong and consistent execution.
Operationally.
Actually sorry, turning to turn to slide seven with me. If you will operationally our second quarter results also demonstrated a disciplined approach to supply chain disruptions that were experienced in China.
And while this delayed some shipments and hurt our sales during the second quarter by the ended the quarter, our factories were at or near full capacity.
And our external supply chain from China is in a similar position.
Point, we expect some shortages and supply in the first half of the third quarter, but if our current situation holds we believe will be in a position of substantially were covered by the end of the current quarter.
From a factories perspective, our HIV business does currently have supply disruptions in both the Philippines, and Mexico and I'll have Randy give you much more details as he gets into the operating.
Results.
While we are while there are countless examples in this current quarter of servant leadership and operational excellence around the company I do want to highlight one specific example.
That really represents the best of who we are extraction brands and this occurred in March.
Within just a couple of weeks or global pet care team.
In Blacksburg, Virginia re purpose parted with facility there and started producing hand sanitizer to combat the spread of this disease and assist with the flight against the Cobot 19 pandemic.
This accomplishment demonstrates our teams drive and ingenuity as the product is now available for use across our facilities. We've been donating it nationally to local health organization hospitals juries charities to different wind workers et cetera, and now recently, we've started selling the product on Amazon.
Under the cutter brand.
I could not be more pleased to see the spectrum family come together.
Not gibbons fear not give into the negative headlines, but instead to take that a positive mental attitude and find ways to be part of the solution and keep moving forward.
In fact, if you looked up locks were facility typically mixed pet products and now it's producing hand sanitizer under a world were known cutter brand which belongs in.
Our home and garden business. So the collaboration here is just just fantastic.
Anyway, let me turn your attention now to slide eight.
Our spectrum 2020 guiding principles remain.
And quite frankly, structuring 2020, which we adopted a while ago is the seeds that did is now producing the results are businesses is is reporting.
They remain vision vision is the is the is the is the core of this and that is to be a strong innovator of great products marketed with excellence and supported by consumer insights clarity, which is our continued striving to simplify our businesses and streamline our go to market strategy to become a much more productive benefit.
One company I think you can see that in this quarter's lift the both the gross margin line the reduction in operating expenses and obviously the lift to the cash flow margins EBITDA margins.
Focus focus we relentlessly focused on best in class customer service now this is our pathway to a consumer driven mindset, we accept nothing but outstanding quality and service, while increasing innovation and continuing to increase marketing investments to drive our brands and our business.
Clearly there is much more work to be done as we entered the back half of this fiscal year to combat the effects of cobot 19.
I'm extremely pleased with the work that we've been doing over the last 24 months to one stabilized the business sector will lead to deliver on our 2019 financial commitments to all of you.
We have completed 3 billion of asset sales in this time, we paid down over 50% of our net debt. During this timeframe and as you can see in these quarterly results. We have returned to our company to a growth trajectory not only on our revenue line for more impressively, our operating income lines throughout our four businesses.
While this pandemic was clearly not foreseeable and it is in fact, they most unwelcome event.
Spectrum brands is entering this next challenge in the strongest position it's been in an over a decade.
In the back half of our fiscal year, we will seek to weather. The cobot 19 pandemic by realigning our supply chains to better reflect and accommodate new demand patterns. We will continue to execute on our global productivity improvement plan with at least $100 million a run rate savings and our teams will.
He's a more consumer driven mindset as we continue to increase our investments in our new commercial operations group, we call it column ops.
Given the manufacturing disruptions, we are currently experiencing as well as rapidly changing economic conditions and the related impact to both supply and demand. It's currently fairly difficult if not impossible to forecast accurately the degree to which our financial results may be impacted for the balance of this.
Full year and as such we have withdrawn or fiscal 2020 guidance. This morning.
With all that being said I continue to believe that our best days are absolutely ahead of us.
As we work to deliver significant long term value creation to our stakeholders and produce sustainable growth going forward.
At this point I want to turn the call over to Jeremy Smeltser to give you more granularity on our financials and then Randy Lewis will update you and take you through.
Greater insights on the different business units, so I'll turn the call over to Jeremy at this point.
Thanks, David Good morning, everyone.
If you could please turn to slide 10, and a review of our Q2 results from continuing operations beginning with net sales.
Sales increased 3.4%, excluding the impact of $7.3 million unfavorable foreign exchange and acquisition sales of $800000 organic net sales increased 4.1% with growth in global pet care HPC at home and garden offset by a slight decline in HR.
Gross profit increased $23.4 million with the largest driver being the tariff related benefit David mentioned of $8.4 million.
This is essentially a recovery of tariffs pay over the last 18 months.
As a temporary exclusion was granted in February related to certain products and skews in our HIV business going back 18 months and expiring this coming August.
You should note that is a cash benefits and would have resulted in higher margins over the past five quarters.
Gross margin of 35.1% increased 140 basis points, primarily related to the tariff benefit.
S DNA expense of $231.9 billion increased just over 1% at 25% of net sales this year compared to 26% a year ago, driven by lower operating expenses.
Operating income was driven by the increase in sales and gross profit.
And in addition, there was recognition of a $7 million gain adjustment on the final disposition of the European dog and Cat food manufacturing operations offsetting higher keep that restructuring costs.
Net loss and diluted earnings per share were driven by loss on our energizer common stock holding despite an increase in operating income lower interest expense and shares outstanding.
No.
Diluted EPS was up 248% attributable to improved operating income the lower interest expense and lower shares outstanding.
Adjusted EBITDA increased nearly 22% growth in H.I. global pet care in HPC offset by slight decline in home and garden year over year.
Adjusted EBITDA margin increased 230 points driven by improved gross profit and lower operating expenses.
In total we estimate that the overall impact of Cobot 19 to the company in the quarter was a net negative seven and a half million dollars on the revenue line and negative $3.6 million on the adjusted EBITDA line.
We also repurchased 2.7 million shares of common stock for $149.2 million through open market repurchases and settled our accelerated share repurchase plan for an additional 300000 shares.
Turning now to slide 11.
Q2 interest expense from continuing operations, a $35.5 million decreased 58.7 million driven by lower debt levels.
Cash taxes during the quarter of $16.3 million were $1.8 billion higher than last year.
Depreciation and amortization from continuing operations at $36.4 million was in line with the prior year.
Separately share and incentive based compensation decreased from 17 million last year, the 15 million this year.
Cash payments for transaction related charges were $6 million down from 14.6 million last year.
Restructuring and related charges for Q2 were 12.8 million versus 4.8 million last year.
Higher cash spend was driven by the Jeep that program.
Moving now to the balance sheet, we completed the quarter with a strong liquidity position, including the cash balance of $458 million.
It's cash balance includes $123 million of cash pulled into the second quarter as a result of entering back into our accounts receivable factoring programs offered by our major customers.
That outstanding was right at $3 billion up as a result, drawing down the ball.
As compared to the prior year second quarter, ending inventory was lower by $168 million.
As enhance demand and supply delays associated with cobot 19, combined with the increased discipline and improved process around inventory management, we demonstrated in the past two quarters limited our inventory investment.
We continue to invest in capacity automation and consumer insights to better manage our working capital and I'm really pleased with the progress this year.
On April Threerd, we strengthened our liquidity by adding the 90 million dollar traunch to our 800 million dollar multicurrency cash flow revolver.
Our strong balance sheet and substantial liquidity position provide meaningful financial flexibility as we entered the second half of the year.
And based on the seasonality of our working capital, we expect to generate substantial positive cash flow in the second half a year.
Additionally, we sold approximately 1 million shares of Energizer stock during the quarter and held just under 4.3 million shares at quarter end.
Capex was $13 million in the quarter versus $13.6 million last year.
Now, we'll turn to slide 12, and our 2020 guidance.
While we expect that our 2020 financial results will be lower than our previously issued guidance and have withdrawn that guidance today. As a result, we did want to spend time discussing our current market conditions.
As David alluded to earlier, we continue to be disciplined around spend control.
This includes actions in Q2 2020 to delay merit increases.
Non essential capital expenditures and projects.
Slowdown on hiring decisions and implement travel bans.
We are also temporarily suspending share repurchase activity.
With regard to the dividend. We currently do not expect to change our approach of rewarding shareholders for the quarterly payout of 42 cents per share.
We believe our strong liquidity positions us to weather the storm of recession and expected near term variability demand and supply.
We plan to continue a conservative approach until we return to a more normalized social and economic environment.
From a demand perspective, so far in April we have experienced continued strong orders and pet and home and garden, while HPC and H. I have begun to see certain areas of slowing, particularly in new home construction and closed retail channels.
Now I'll turn it over to Randy for more detailed look at our operations.
Thanks, Jeremy Good morning, everyone and thank you all for joining us.
My comments today will focus around our operational performance in Q2, and putting the impacts of coping 19 progress we've made on our global productivity improvement program.
A review of each business unit to provide you more detail on the underlying drivers of the performances.
So as David mentioned Q2 represented a very challenging environment for managing all aspects or business in response to the co that crisis.
Have been incredibly pleased with how all areas of our organization have responded as a result financial impacts that cover 19 on our Q2 performance. We are relatively small as you heard from Jeremy.
In the back half of the fiscal year, we do expect to see more impact from both supply and demand that will vary by business unit.
Early in this quarter in response to the Corona virus, the Chinese government extended the lunar new year and shut down operations. This did create delays for us and our supply base in China.
Maybe a tax our safety stocks when many finished goods and components. However, we are pleased to report it by the ended the quarter, our Chinese factories, and our Chinese supply partners were at or near full capacity has that country returned to work.
While this may create near term delays for the third quarter what products are in transit we believe that at the current situation holds those issues are largely manageable.
Towards the end of March in early April we saw government restrictions impact our HIV facilities in the Philippines in Mexico.
These orders limited us are required us to limit production capabilities in our Philippines factory ended one of our Mexico factories.
Requiring us to temporarily suspend operations at another Mexican facility.
Our team has responded quickly to these limitations you putting redesigning work to be more efficient with reduced staffing ramping up production at third party partners and moving work to other manufacturing locations where possible.
Notwithstanding these measures our manufacturing output continues to be constrained, while we hope we will return to full capacity very soon situation does remain uncertain.
Additionally, we temporarily shut down our home and garden manufacturing facility in Saint Louis, Missouri towards the end of March because of confirmed cases of cobot 19, amongst our own employees.
Our teams reacted quickly to close to plan for deep cleaning redesigning work environments and perform additional employee training, we were able to reopen with only a few days of total downtime.
The facility is currently operating a slightly reduced staffing level, while we expand production and very measured way, we're continuing to monitor that situation and all other locations and feel that we have the preventive measures in place to protecting the health of our employees, which is our primary concern.
We have extensive safety measures in place at all of our sites.
Vigilant in consistently reviewing our processes and protocols against the latest data for this disease.
It's important point out that all other facilities around the globe remain open and operational as part of our central businesses, we continue to manufacture distribute and supply products that centered around the home and we remain open under government shelter in place orders based upon that qualifier.
However, until the impacted facilities are fully operational we do expect these constraints. So women output for some security products in HIV and some control products in home and garden.
We have been able to respond quickly these events due to the actions of our global Cobot 19 response team.
It's a cross functional cross regional team, where we are collectively harnessing our experiences and best practices to benefit all the businesses combined.
This team is prepared our facilities and our employees for the impacted this virus and there's been great work and everyone involved to provide a consistent approach across all aspects of our enterprise.
Turning to slide 15 from a commercial perspective, our teams are reacting quickly to changes in the market due to covert 19, our marketing and commercial operations groups have adjusted our consumer facing messaging to make sure that it is appropriate authentic and carrying in the context of today's reality.
This includes highlighting how our products help people live a better more enjoyable life at home.
In this new reality, we've seen particular interest in many of our products, including men's haircut kits with Remington brand.
Russell Hobbs, and black and Decker products in the kitchen.
Companion pet care products as we're experiencing a period of elevated dog adoption rates and even a strong increasingly demand for aquatic systems as consumers appear to be investing to create a more rewarding home environment.
At the same time from a macro perspective TDP levels had declined significantly over the past few weeks and while we believe our products are very well positioned for the future. The overall level of consumer demand recovery is difficult to predict.
Additionally over the last month, our digital teams have moved quickly to create content that appeals to consumers who are now allocating more time shopping online for home improvement personal care and other products in our lineup.
Pandemic has accelerated are already fastest growing channel.
I share in Q2, our E Commerce business grew almost 15%.
This year, our ecommerce growth in Q2 was over 38%.
Well, we believe these changes in consumer behavior will have lasting impact. So we are planning not just for the near term, but for the long term implications of this societal milestone.
Led by our newly formed commercial operating rate cut commercial operations team. David mentioned, we're dedicated to gathering insights for this pandemic in adjusting very rapidly to our business strategies to pivot towards the new ways to consumers are behaving today and in future to improve life at home.
Now turning our focus back to the present operations on slide 16, we want to provide an update on our global productivity improvement program.
As a reminder, one of the important aspects of this initiative is to create and leverage new capabilities to drive product and brand strategies of our individual businesses with consumer insights and data from an efficient service team that brings us together as one company to harness our collective power and resources.
In many ways. The current Cobot 19 challenge has accelerated spare to this plan in promoting partnership and collaboration across the business units regions and functions.
As I've said before this program continues to be our most important strategic initiative for Dilip delivering long term sustainable organic growth.
As we focus on quicker more globally align decision, making within each of our businesses.
And driving more focused and relevant product innovation enhanced consumer analytics in R&D processes.
On the cost front the Jeep Pip program, we continue to expect the gross annualized savings to deliver at least $100 million annually and that these savings will be at full run rate within the next 12 to 15 months.
Much of the savings is being invested back into the growth initiatives and consumer insights R&D and marketing across each of the businesses to ensure long term sustainable organic growth.
We look forward to continuing to provide more details on the Jeep pit program on our future calls.
Now, let's dive into more detail some performance of each of the four businesses.
Starting with home hardware and home improvement on Slide 17, second quarter reported net sales and organic sales decreased 0.6%.
The net impact of Cobot 19 in the quarter. It was nearly $3 million in revenue loss due to supply challenges.
Which one offset orders, we believe customers may have pulled in into the second quarter.
Adjusted EBITDA increased 31.9% driven by the catch a benefit of 8.4 million from retrospective tariff exclusions, but also productivity improvements and favorable mix, partly offset by tariffs expense.
In the quarter HIV successfully unveiled the Halo touch why five smartblock, which integrates biometric technology with the convenience of remote functionality.
Product was very well received in one multiple new product towards at the consumer electronics show in January.
Early sign show, a very high level at retail and consumer intent pointing to a successful launch in the summer of 2020 in the plumbing segment H.I. continues to see success in expanding retail listings and has been awarded new business in wholesale distribution driven by strong design capabilities and the ability to deliver popular new styles that consumer relevant pricing.
This concludes the new partnership with Clayton homes, a top builder of manufactured modular and site built homes in the United States that Leverages, the scaling innovation of quickset, and a strong design and value of Pfister together.
Hi, expects demand disruptions in both retail and wholesale channels due to the impacted cobot 19 in the back half of the year day CCI team continues to take actions to mitigate supply chain disruptions related to covert 19 or facilities in Mexico and in the Philippines, well, our teams are shifting capacities and capabilities to other facilities.
We do expect reduced output for residential security to negatively impact second half results.
Now at home and personal care, which is slide 18.
Reported in organic net sales increased 5% and 7.5% respectively.
Adjusted EBITDA improved three and a half million dollars to $8 million or 78% increase.
Net sales were driven by growth throughout the quarter across all regions and in both personal care and small appliances strong net sales growth in the U.S. was driven by mass and online channels. Despite declines from the impact of temporary store closures of many department stores and specialty channels. During the last few days for the quarter.
EBITDA growth was driven by higher volumes lower operating expenses and productivity improvements, partially offset by foreign exchange headwinds and tariff costs.
The teams renewed focus on supporting our brands and investing behind fewer bigger and better products helped drive topline sales. One example of strong sales growth included the partnership with the calm ops team to drive online growth and increased customer engagement with improved digital content.
In mid March we introduced the George Foreman smokeless grill at Walmart.
Able and convenient and healthier meal preparation without the mess and smoke from stove top cooking, which is perfect for a time when consumers are preparing more meals at home.
George Foreman smokeless groceries will be available in the coming months. It most retailers were small appliances are pound.
In addition, Remington continues to advance its leadership in hair care appliances over 15% growth in both Europe, and North America bolstered by the success of products like the twisting curl multi styler and the kurland straight confidence collection.
Over the last few months or marketing teams were quick to respond with digital content ranging from DIY home haircut.
Coffee at home placements baking in home cooking solutions.
Well, our China based factory capabilities are largely back to pre pandemic levels. Our second half results will be impacted by some supply disruptions in the current quarter from previous production gaps.
Volatility in demand patterns and from the continue closure of non essential retailers around the world.
Moving to global Pet care, which is slide 19.
Second quarter reported net organic sales increased 10, 22% and 10.6% respectively.
Adjusted EBITDA increased by 22%.
Higher net sales were attributable to strong growth in both the companion animal and the aquatic categories with growth occurring throughout the quarter.
Higher adjusted EBITDA was driven by volume growth productivity improvements and positive pricing, partially offset by higher tariff costs.
Well from the quarter the pet care team successfully completed three major productivity initiatives.
First the closure of the Cambodia Rawhide manufacturing facility.
The Cambodia facility was the last remaining rawhide manufacturing location that we operated this action actually it was a continuation of our strategy to exit non core manufacturing assets.
Second the team also finalized the sale of European Dog, and Cat food manufacturing facility, while simultaneously entering into a multi year supply arrangement with the new owner.
The new owner has the scale to bring needed volume to the facility. This again demonstrates the team's commitment to the strategy of addressing underutilized manufacturing assets.
And third the team also added the Omega one brand into the portfolio through the acquisition of the Omega see company.
Well make a C as the leader in the us in freshly frozen aquatic nutrition market with premium positioning and strong share in pet specialty an independent pet channels.
While the business is relatively small from a revenue perspective is tuck in acquisitions highly complimentary to our existing portfolio with untapped future growth opportunities as we execute our strategies.
Okay.
Q2 represented the six consecutive quarter of year over year topline and fourth consecutive quarter of bottom line growth for this business unit.
As the market leader in four categories, which are aquatic dog chews pet grooming pet Stena Notre the team will continue to drive growth by investing in the creation of platinum products and by focusing on our growth brands.
And finally home and garden, which is slide 20.
One quarter reported net sales increased 0.1% and adjusted EBITDA decreased 4.1%.
Net sales were essentially flat with the prior year, despite difficult year ago comps and covert 19 related transportation shortages. This year as strong Pos in the quarter generated early season orders.
Sales growth of our brands was offset by a decline in private label and captive brand sales.
The EBITDA decrease was primarily driven by the covert 19 related revenue impact.
Our strong early season orders were driven primarily by new items increased product placement and favorable weather, which has continued across much of the U.S. as we enter our largest quarter.
The vast majority of our retail partners, including our three largest remain open as essential retailers in the U.S.
Our main manufacturing facility remains open in operational but we do expect some capacity constraints in Q3 as a result of implementing processes to ensure employee safety.
We're working through the supply chain constraints in order to meet the strong demand for our products that we are seeing continue as we go into April.
The fundamentals of this business remains strong and solid profitability in high barriers to entry. The team continues to drive efficiencies from the Jeep program.
Sure, enabling incremental investments to support our growth strategies, we're confident that our strong brands and investments in product development and marketing will accelerate long term growth rates.
So to wrap up my section I want to reiterate how pleased I am with the progress that we've made on our operating culture and our strategic initiatives and to thank our 11000 plus employees for all they're doing to make us proud these days.
So with that now back to David.
Hey, Thanks, very much Randy Thank you Jeremy.
Hello, everyone on the call.
Look we've covered quite a bit today, and so what I'd like to do if I could as I'd like to just concluded was kind of the key takeaways in my mind.
First our global productivity improvement program and the action we've taken over the last 24 months are really paying off and they are reflected in the strong performance that we just reported.
Make no mistake about it.
Performance that we just reported as a direct result of the seeds of investment that we began planting in our business over 24 months ago.
We remain absolutely committed to this program, which we believe is the foundation for the long term growth of our company.
Second in terms of our financial performance this quarter I am thrilled that we had.
Both top and bottom line growth before and during the first part of the Cobot 19 pandemic.
Im very pleased but at the end of the second quarter. We're tracking ahead of our earlier expectations.
Third our global teams demonstrated strong operational excellence across the board, including our response to the Cobot 19 pandemic.
I have to pause here and I'm not in the script, but I really need to think Rebecca long.
Who runs HR for us and on our global co. Good 19 response group.
Really done a fantastic fantastic job, so hats off to all of you. Thank you indebted to you.
Personally extremely proud of all of you for your help a little us six weeks been amazing.
Fourq.
We're very very well positioned from a balance sheet perspective for further dislocations in the markets should they occur.
We have upsized, our revolver, we've significantly increased our liquidity position. There is I'm talking to you today, we've got over half a billion dollars of cash in the bank.
And we're going to build on that cash balance as we go through the balance of the year, we do generate a lot of free cash from operations over the next couple of quarters, and we have multiple levers for additional sources of liquidity.
It was a strategic intent of mine with the asset sales to make sure. We had no senior secured debt and our entire capital structure post those assets sales other than the revolver.
So I feel very good about how we positioned ourselves on the balance sheet liquidity side of things.
Fifth.
We do believe that.
Despite what's going on in the world around us our consumers are going to continue to look or two spectrum brands or for central business units and find themselves at home with our innovative products and our great brands for those reasons I really think we're well positioned financially and operationally to weather the storm.
With all that said I don't think anybody can really tell you what the future is going to look like over the next three to six months.
We've certainly seen tremendous volatility and uncertainty are ready.
The degree of supply disruption demand disruption in the economy in general.
Do not know where GDP is going to go down to where discretionary income levels are going to be.
So this is an unprecedented tar for all of us and our company.
So that that's reflected in the withdrawal of our guidance is just the uncertainty around where we currently are and where the net new normal may be the one thing I can definitely say as we continue to be laser focused on our company, our operations or employees and creating great shareholder value over the long term so without I just want to thank.
Everyone for that so I am this morning.
Appreciate your continuing support I hope you and your loved ones for me say stay well and as I like to say stay positive. So I'll turn it back to Kevin Kevin for any questions.
Great. Thank you David Dullum lets just dive right into Q anyway.
Thank you Sir as a reminder to ask your questions you would need to press star one on your telephone.
Your your question press the pound key.
Standby, we compile the culinary rosner.
I show My first question comes from Olivia Tong from Bank of America. Please go ahead.
Great. Thank you good morning.
Oh, let's start with a couple of questions around Sal.
I think salary pretty dramatically this quarter. So can you talk about the changes.
How much was there any potential catch up pull forward.
Let me just a longer term application.
Inventory.
How the organization and balancing the near term objective given the challenges in the current environment versus potentially needing to rejigger expectations here I think given what could potentially be longer lasting structural changes in demand in some of these categories just trying to understand how you're thinking about how does this change is once again.
For corn keeping.
Supply chain.
Area.
Think about whether it's Kevin.
Okay.
Oh, there's a whole lot is there some enough to end this over to Randy to build on it but I would tell you that.
You know listen we feel really great about those are suddenly opening remarks, nor for core or all of our business is all four of them are essential.
Core of our business themselves and they have aluminum and.
You know, it's just we kick since there's just no way for for me to tell you where GDP is going to be in September Theres No way for me to tell you were discretionary income levels were going to be frankly, I think our pet business. You know I think is very resilient.
During the sort of economic downturn and Frac, we're going to continue to invest there.
And then build.
You know I would started at home and garden, while this quarter was flattish and we've got some supply chain issues. There are things home and garden as an extremely resilient business.
Just like it took us a little while to get cut turned around you know, we're making real strategic investments in the home and garden or do you with innovation with new pipelines and so.
You don't don't think we're going to take per foot off the gas anytime soon on home and garden.
Quite frankly.
With the Pet division actually chip in it and hoping produced hand sanitizer.
You may see more quarter advertisements. This spring this summer than you've ever seen so.
We're going to continue to pick our spots and be aggressive through this.
Look clearly you know if if everyone stays in their home shelters employees and economic activity is very bleak.
For two or more cyclical businesses saw an HR would suffer appliances, we pride supply chain disruptions were fixing that now, but even there were more value price point I'm not cheap, but great product had a great price.
So we'll see but I'm you know again I think you mean take away from me before I turn it over to Randy is look I'm actually thrilled. We you know again, we're now seeing the results of a lot of hard work a lot of investment over the last 24 months and.
While.
You know I really thought this was just going to be a blow it out of the water year, and we were going to have an amazing stock price and all the rest of that.
You can see I personally, what's yours, 60 bucks not too long ago.
Didn't foresee a pandemic in my forecast, but.
Our fundamental earnings power is very much intact, and we're still steering the ship.
Towards seven Bucks is your free cash.
And I just can't give you the timing of after we'll get there. So Randy you want to build on that give more color.
So good morning, Olivia just back to your original question as far as how we were thinking of.
The impact in the quarter and whether or not there was co that positivity that was the result or with the driver of the Q2 results and again as Jeremy said, when we look across the business as we think that.
The co that situation was actually a net drag on revenue for the quarter. We had three of the for businesses that actually had a negative our pet business. We believe did see.
A slight benefit a couple million dollars, maybe in the quarter on on revenue.
But for the most part it was across the board a negative to us.
With regards to all the forward looking questions that you asked right now we're going to we're going to try and be as disciplined as we can be to cannot go there simply because it's uncertain and maybe I can talk a little bit about the process that we're employing so.
We are divided this situation into the immediate the intermediate and the longer term thing we'd ensured that we have collective groups that are managing across all businesses and their discreet and independent and led by separate teams. So that we don't get tunnel vision within the current environment and not pay attention to the long term. So as an example of watching.
POS and all businesses daily trying to make sure that we are adopting our processes such that we're in Interjecting new information from the market as quickly as we possibly can to adjust our our orders our inventories trying to see where consumers are going.
And just being able to react as fast as we possibly can we feel good about our ability to to make the most of how we go forward, but as David said, we also feel really good about all the changes that we've been making to the Jeep that program. The cultural changes and believed that we we've been able to respond to this crisis in a way we we never could have.
24 months ago, So I hope that helps.
Super helpful. Maybe has only just filled on impaired.
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Hi.
What's that perhaps that's providing.
Before you had implemented these actions.
Let David kind of mentioned greater than 100 million dollar turned it sounds like the second to that target.
Just to understand and believe that hit that.
Over the time from that you talked about given some of these.
Operation shutdowns.
Yes.
Government restrictions as you saw on there I mean agonizing that there are some project, but having to do this year that maybe you can get pushed out because the myers.
Factoring or even if it requires and partner.
It sounds like quite simply right now isn't feasible.
Great question, Olivia So I would tell you that it's absolutely. The case that there are executional things that are happening, where we're happy to make adjustments are just being prudent to reduce risk and execution, but I can tell you that those impacts are.
Very minor in the overall scope of the project and quite frankly.
In no way of endangering the commitments that we've made publicly because as we've continued to say last couple of quarters that 100 million dollar target is is the bare minimum that we anticipate delivered.
Thanks, so much the well.
Thank you Olivia.
Thank you I'm next question comes from five always choices.
Yes.
Yes, hi, good morning.
So I guess my first question is I know that it's difficult to Jack and look ahead, but I was wondering if you could share some trend in terms of what's been going on into various segments as it relates to sales in the month of April.
Yeah, I mean listen I don't know again, we're going to try to be disciplined about I think we've told you we are pretty durable businesses everything we do.
It is in and around the all.
And you know there's reason lawyers want us to remove guidance because of all the different variables. So we don't want to mess that up but.
You know I think I think what we've said in the prepared remarks, congrats we've seen.
Some resilience in some stability in.
In pet and home and garden and quite frankly.
Andy talked about you know kitchen products being in demand here cut kits being in demand and.
A lot of growth and Remington was disclosed today I.
I think you'll see us continued to do advertise there.
You know, we're starting new businesses like cancer Center ties are.
And we do have micro bond on our quickset door locks and handles and people are sensitive about germs theirs.
There's a lot of waste spectrum brands can play offense here and but look we're an unprecedented times and we took a very defensive posture.
And we'll we'll just as things go forward, but.
I want to be clear I don't take our earnings power is that all jeopardize. It's just you know if we go through a pretty deep recession, or we would expect demand to be hit and so those.
That's that's why we've given you have given.
Randy you want to it.
You want to the stub earlier build on it the truck from.
No surprise I think Thats, what David said is what we're going to stick with we've.
Aprils.
Been pretty much as we expected internally across our businesses and that's just one month in a long period.
Okay, I guess, if I can just ask like where do you see the most amount of certainty.
Certainly I think you already said that 18, you tie in each be HPC segments are more cyclical.
But I'm just wondering is there more uncertainty in terms of the demand dynamics, the overall or more in terms of.
Flying our cost.
Demand the biggest variable.
Going forward. Thank goodness initially we got hit with the supply chain issues out of China are those going to January February but six weeks on the water puts a little bit of your bubble in there and so you know look quite frankly, we have a lot of skews that are an exceedingly high demand and we're trying to fill out and so when you talked about cost.
You have to look at things like your free versus a versus the water, but it's not material and then you know I think we've basically told you that even after the you know was what I would say.
In the depth of this thing we've we've seen continued good results other auto pet and home and garden and we've got a little bit of supply disruption in HR, we have to solve right now in Mexico in the Philippines.
But again, we're very blessed no all or majority of our retail partners are open we have outlets and consumers are for shopping.
Alright, thank you.
Thank you.
Our next question comes from Bob Labick CJS Securities. Please go ahead.
Good morning, Thanks for taking the questions.
I wanted to stick with supply chain first you, obviously mentioned the constraints in the timing.
Yes air versus see could you give us a.
Maybe a rough level of capacity you're running at maybe by segment and then the other part of the supply chain just to ask can you remind us how much of your products or come out of China versus elsewhere, and maybe a longer term question is how you're thinking about the supply chain overall when we come out of this is are there any.
Changes, you're thinking about making too.
Diversify it further.
Look I think we actually have some competitive advantages versus you know some of our competitors or we have a pretty global footprint and supply chain and Agee giant.
The vast majority of that is opened today in terms of China clearly, that's that's a big source of our appliance business Thats. Its the primary source of it but again that supply chain is reopened in is robust and so it's just a matter of getting the product to the to the retail partner.
But oh I'll, let Randy.
You know build on this if you'd like Randy.
Hey, Bob.
The interesting thing that transpired over the course of this.
Pandemic is that early on when the issue was Chinese manufacturers and suppliers.
China sourcing was a very bad thing and consequently, just a couple of months later, we're actually in a situation where one of the most reliable sources of supply from materials coming out of the world right. Now is in China is just a matter of swallowing the short period of transportation in between.
So yes, we think we said before that were.
Roughly two thirds or so sourced out of China across all of our businesses combined.
That's that's the least of my concerns right now because that's under control and at least for now I mean, everything can change, but as things continue to look right now.
That's the most stable portion and we're continuing to solve the other issues as as they come along.
Kind of great. Thank you and then just pivoting a little bit obviously as you mentioned, you're very fortunate to be selling a central products at central retailers, mostly but theres obviously also.
Large increase in online shopping and we've talked about for several quarters. Your online approach just wondering.
How your capabilities stand today for online purchases and how it's evolving and if that's accelerating as result of the pandemic.
Hey, Randy why don't you take it and once you talk about not just calm ops book you know the marketing some of the video some of the digital you give them labor there.
Yes, so so Bob in that space. If you go back we've we've made very discrete and strategic investments.
And what we call.
On the channel management across the top of all four of our businesses starting about 18 months ago and so weve built the team is headquartered out of Austin in that's made up of some of the best and brightest minds, we can find from the ecommerce retailers space as well as data scientists and others.
And attached there was to ensure that we were getting more than our fair share any transition from brick and mortar into the.
E Commerce, while at the same time, ensuring that we weren't putting our brick and mortar partners at any sort of it is disadvantage and so that team is just performed fantastically.
And so whether it'd be the sales side in the interface side with the customer whether it be the.
The optimization of search and all of the.
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Analog issues that need to be dealt with but also the creation of video content and so as we've created this commercial operations team, we've separated out content creation from the marketing approach from this data science approach. So now we have a very procedural approach to all of our businesses on how to opt to.
Hi, guys ecommerce and so we believe that in most of our business has that transition from brick and mortar to E com.
That's a net positive impact on our share position.
Okay, great very helpful.
Thanks very much.
Thank you.
Our next question comes from in the Pheno from Oppenheimer. Please go ahead.
Hey, guys.
Mark on free and thanks for taking our question.
It's interesting you guys are still active on M&A. So can you can give a sense of the pipeline going forward and you know wish lines of business do you guys Youve <unk>. The most opportunities are there any specific area that they're targeting and how's your investments.
Philosophy changed at all given the current environment. Thanks.
Well look I mean right now you know we're you know we you know we're open for business for M&A, but look I think you know.
Our shares represented quite frankly, the cheapest allocation of capital we could find and we've been we've been buying a lot of shared.
We're pandemic at us and we thought the prudent thing to do was temporarily suspended.
But.
Look I think you know there's lot of dislocation in the market and so if we can if we could buy something cheaper than were own shares trade.
You know and its accretive and it fits with or where the core portfolio asset we do that but I don't you shouldn't expect anything large scale. Other most at all and I'm planning to build a very very large cash position between now and the ended the year. So that if we want to do we could pay off almost a third award debt at September 30. So we're we're generally.
Reading a lot of cash for the balance of the year and.
We will we'll reassess the.
But yeah, it's strategic it's small and.
It's highly highly accretive tuck it in you know were opened but.
Again, I think are or stock, even where it is today relative to our fundamental earnings power is materially undervalued.
We just want to see some stability over the next couple of quarters get the understanding of where our good demand is discretionary.
Income and consumption is and b and be prudent before we make any more material capital allocations.
Okay, great. Thank you very much.
Thank you.
Next question comes from William Reuter from B of a securities. Please go ahead.
Good morning, just to follow up a little bit on the manufacturing are the facilities in Mexico in the Philippines currently operational or are those shut down and I guess, just with the one facility in Saint Louis what percent of capacity or you're out there.
Yes, so look the boot facility situation is we're.
We're operating the Philippines reduced staffing levels, we were operating its just.
We had we had a temporary reduction and as this we protect our people first and as we deemed safe we ramped back up we have a similar situation and one of the facilities in Mexico and then one of our facilities in Mexico is currently shut down and we're working on getting at reopened as we speak.
Okay, and then you gave some ecommerce growth rates, where those direct to consumer sales or were those from your customers as they sell to the final customer.
No we partner with the with the dotcom, so whether its Walmart dot Com home depot Dotcom Amazon those data relates to those.
Great that's helping me thank you.
Thank you.
And last question comes from Karru Martinson from Jefferies. Please go ahead.
Good morning, just wanted to look at <unk>.
Point of sale, how how is inventory trending at those essential retailers that are still open and how is the supply chain for distribution been to get some supply.
I mean, there I'll, let Randy dollar, but I mean, we're like I mean, we need to get them inventory.
Almost across the board.
And so you know.
You should definitely take away I mean, again, where we don't know were GDP will be we don't know were discretionary income will be in six months.
But you know we are retailers are there they're looking for a lot more pet products right now they're looking for a lot of home and garden product right now there were looking for.
Selective much more skews in appliances, and and because of certain temporary reduction in production in each I know, we reduced we're reducing our safety inventory there and we've gotta, we got to replenish so I hope that gives you a good feel but I'll pass the book to Randy for further color.
Now I'd, just say that it varies by region by product.
Channel et cetera, but overall most of our situations are in a net reduction in retailer inventory versus same period, a year ago. So there was a net de loading of inventory over the course with the quarter across the enterprise for spectrum brands.
Okay, and then particularly on home and Garden do you feel that.
These these are seasonal products that you don't get the fertilizer sale now not fertilizer for the grass seeds and everything else that we won't have that that sale coming through or was this something that will build as as you get those supplies.
Normals normal levels.
So it's important to understand that are we don't we don't participate in the categories of fertilizer or grass seed or politics, which tend to be earlier season categories and so our peak demand at retail is in the June and July timeframe. So.
Our home and garden business almost always experience has its largest Pos week. The first week of July So we're still in the in the prebuilt side and our our POS numbers on that business continued to be three very strong. So we do not believe at this point that were.
Losing material retail sales, because we're still running probably at a 25% to 30% rate of what our seasonal peak Pos will be at retail.
Thank you very much guys appreciate it.
Thanks for.
Thank you. This concludes our Q and a session at the time I'd like to turn the call back to Mr., David Mara Executive Chairman and CEO for closing remarks.
Actually I think its hopes up my closing remarks Atlanta.
Thank you guys for joining us.
Really appreciate your your time your attendance we appreciate your support.
We wish you, a nothing but health and safety and.
Yeah, good out there in but some of our new cutter hand, sanitizer. So thanks very much for your attendance and we'll talk to you. So look forward to update you in the future.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
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