Q3 2020 Spectrum Brands Holdings Inc Earnings Call
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I'd like to turn the conference over to your Speaker today, Kevin Kim de VP of Investor Relations. Thank you. Please go ahead.
Great. Thank you Angie walking to spectrum brands Holdings, Q3, 2020, <unk> earnings conference call and webcast and Kevin can be VP of investor relation and moderator for today's call to help you follow or comments, we have placed a slide presentation on the event calendar page in the IR section of our website at Www dot.
Actual brands Dot Com. This document will remain there following our call.
Starting with slide two of the presentation, our coal 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 acuity.
The slides three and four our comments today include forward looking statements, which are based upon managements current expectations projections and assumptions 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 statement outlined in our press release data today July 31st 2020, and our most recent SEC filings and spectrum brand folding most recent annual report on form 10-K and quarterly Rick.
<unk> on form 10-Q, we assume no obligation to update any forward looking statements 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 today's press release, and 8-K filing which are both available on our website in the Investor Relations.
Section I will now turn the call over to David.
Thank you Kevin Good morning, everybody. Thanks for joining us today for third quarter call.
Before we turn our attention to the company's third quarter results.
I want to say again, thank you to all of our employees, who got 11000 plus employees around the world.
And do all works like one workers in or South region distribution centers.
I'd like to say. Thank you you guys are the true heroes should more company.
Youre sharper prices are allowing spectrum brands to embrace our new identity as a true homes sensors company.
Because of you, we're innovating marketing and we're bringing joy happening at the store consumers worldwide, whether it's in the kitchen the yard Roma, how well with your pets.
We are delighted to make was better and more joy able for consumers more products and services dropped Flynn.
Turning to slide six.
Our results this quarter reflected strong demand that accelerated throughout the course of the quarter.
Simply put we have embraced our position as a home essential business instead of pulling back in the face of the covert 19 challenges, we're continuing our drive to add talent create new innovative products and improve our operating model.
In addition, just in the last 60 days and ramping up in the current quarter, we've committed to significant increases in our advertising investments to meaningfully accelerate the long long term organic growth were company.
The actions of our spectrum brands family reflect resilience in operational excellence and this ever evolving environment.
This includes adopting safety protocols in response to covert 19, navigating temporary government mandated factory closures that have impacted hardware and horrible hardware at home improvement businesses.
And balancing strong underlying demand, including large mix shift.
The temporary covert 19 related supply disruptions from or HR division negatively impacted results this quarter, but we believe the situation is largely resolved and supply is expected to be caught up by our first fiscal quarter.
Furthermore, our global productivity improvement plan savings positively impacted each more for businesses in the third quarter as we indicated earlier in the year. These savings are now beginning to outweigh the headwinds from the Annualization of tariffs, which we expect to be incremental $70 million.
In this fiscal year.
We continue to expect GE Pip to generate at least $100 million. Some full run rate cost savings over the next nine to 12 months.
To be Frank I continue to be very excited about our global productivity improvement programs. The impact of this critical strategic initiative is evidenced more and more everyday with our employees and increasingly more with our customers and investors.
The savings across procurement initiatives and operating model improvements are driving real benefits eating our commitment to deliver sustainable organic growth.
Balancing these savings with reinvestments, and allowing us to plant the necessary seeds back into our businesses to grow our biggest most promising brands and in fact, we're doing just that.
As a home a central company, our products do ball revolver and center around the home.
Aided by our commercial operations team or what we called column ops Weve quickly pivoted to ensure our new products and incremental advertising investments resonate with consumers finding themselves spending more time at the home.
Since the initial changing consumer behavior back in March or call Mops and business units work together as one to recognize adapt and lean into the spike in at home trends.
Positively impacting every one of our businesses. We believe this trend is a sustainable tailwind to drive growth and repeat purchases as consumers spend more time on the home front.
Starting at our home and Garden Division, along with our home and personal care unit and expanding during the July 4th holiday across all the other business units, we have approved about $20 million of incremental advertising spend that will continue into the first half of 2021.
We expect these investments to drive returns from the George Foreman Smokeless girl to the Specter side you hold.
Just to point out a couple again instead of pulling back.
The company is leaning in we are investing and we are expanding.
From a balance you perspective.
We continue to be focused on liquidity and a strong balance sheet.
On June Thirtyth, we strategically refinanced our existing 890 million dollar cash flow revolver, and we replaced it with the new five year 600 million dollar car cash flow revolver, and a 300 million dollar 10 year senior unsecured notes, which are due in 2030.
This leverage neutral transaction allowed us to maintain a very strong liquidity position, while extending them pretty profile of our debt and locking in favorable pricing.
Also during the quarter, we did opportunistically, so 1.1 million shares over Energizer common stock holdings for proceeds of about $50 million and we ended the quarter with a 3.1 million share position and energized.
If I could have you turn to slide seven now please.
Third quarter results.
Represent the three or three or four business units during the third quarter actually generated healthy organic growth and despite group with 19 related challenges or global team generated financial performance that was consistent with the prior year.
Importantly, or ecommerce business continued to generate exceptional growth across all the businesses with sales up 44% compared to the prior year and now representing approximately 16% of our base business total demand remains strong with July net sales up across all business units.
Our futures bright as a homosexuals company, we believe we remain well positioned financially and operationally to drive long term sustainable organic growth.
Turning to slide eight.
I'd like to take just a few moments to look back just over the past 90 days some comments from our last earnings call.
If you remember I concluded my second quarter prepared remarks, indicating our plans to realign our supply chain to better reflect and accommodate new demand patterns.
Plans to continue to execute on our global productivity improvement programs.
And to embrace a more consumer driven mindset.
We delivered on those expectations in the third quarter by achieving better than expected results in the midst of a very challenging environment.
Taking another step back in the face of incremental tariffs and cobot 19 challenges. So far this year, we have grown organic sales and adjusted EBITDA. Despite significant supply chain issues. While our teams are focused on finishing the year strong early.
Recent results demonstrate our resilience as a leading consumer Staples company, we believe our laser focus on operational excellence driving efficiencies through our global productivity improvement plans and investing back in the business to drive long term sustainable organic growth continues to point the way to very bright future.
But have you turn to slide nine.
In the presentation.
Our employees.
Or the absolute heroes of the story they continue to demonstrate servant leadership across the businesses and this includes our work to launch timely new products.
Teams innovated by introducing quarter hand, sanitizer and more recently Nature's Miracle disinfectant.
Our plants in Blacksburg, Virginia, Meli, Germany continued to designate part of their facilities to presume produced hand, sanitizer and help combat the spread of Cobot 19.
Given the continued needs we continue to donate these products and so far weve donated to many organizations some of which include the Saint Louis area Food Bank, the northwest, Arkansas, Food banks, and New York City relief as well as many many organizations around the country in the World. These products are also available now for.
Purchase on several ecommerce sites.
Turning our attention now to slide 10, just as a reminder, our spectrum 2020 guiding principles remain vision clarity and focus as we create the faster smarter stronger spectrum brands of the future. Our vision is being a strong innovator great products supported by currency.
Your insights and marketed with excellence, we are bringing clarity to organization by continuing to simplify our business streamlining our go to market strategies, and becoming a much more productive and efficient company.
Our unwavering focus on best in class Conns customer service.
This is our pathway to consumer driven mindsets across the businesses and we accept nothing but outstanding quality and service, while increasing innovation and marketing investments to drive our brands and the long term growth of our businesses I continue to believe the best days are ahead of this company as we work to deliver significant long term value career.
Turning to our shareholders and produce sustainable growth going forward.
Now you'll hear a much more from Jeremy on the financials and Randy will walk you through the additional business unit.
Sites I'll now turn the call over to Germany.
Thanks, David Good morning, everyone, turning to slide 12, and a review of Q3 results from continuing operations.
Getting with net sales.
Sales decreased 3.7%, excluding the impact of $11 million, an unfavorable foreign exchange and acquisition sales were about $3 million organic net sales decreased 2.9% with growth in global pet care home and personal care at home and garden offset by a decline in hardware and home improvement due to the supply challenges.
Gross profit decreased $12 million in gross margin of 35.4% increased 10 basis points despite supply restrictions.
The favorable product mix and improved productivity.
SGN expense of 225 million decreased 3.4% at 22.8% of net sales consistent with last year, driven by lower operating expenses and restructuring costs.
Operating income growth of 1.9% was driven by lower restructuring activity, partially offset by the supply disruptions in hardware and home improvement.
Net income in diluted earnings per share were driven by gains on the company's energizer common stock holding gain from the extinguishment of seamless siloed debt and lower shares outstanding.
Adjusted diluted EPS increased 0.7% as favorable product mix improved productivity and lower shares outstanding were partially offset by supply disruptions from HHR.
Adjusted EBITDA decreased 4.9% and adjusted EBITDA margins decreased 20 basis points.
The decline in HIV was partially offset by growth from global pet care home and personal care and home and garden.
In total we estimate that the overall impact of coven 18 to our ability to supply product in the quarter reduce net sales and adjusted EBITDA by over 100 million and $30 million respectively.
Turning now to slide 13, Q3 interest expense from continuing operations of $36 million increased $2.2 million driven by higher debt from the revolver borrowings.
Cash taxes during the quarter 3.9 million were 3.7 million lower than last year.
Depreciation and amortization from continuing operations of $35 million was 1 million lower than the prior year and separately share and incentive based compensation decreased from 15.6 million last year to 14.2 million this year.
Cash payments for transactions were 7.2 million down from 11.8 million last year and restructuring and related payments for Q3 were 25.2 million versus 14.6 million last year.
The higher cash spend was driven by GE pet.
Moving to the balance sheet, we completed the quarter by building meaningful financial flexibility with a strong balance sheet, including sequentially, improving our liquidity position and maintaining ample ample flexibility on debt covenants.
We had over $800 million, a total liquidity, including a cash balance of 466 million and $341 million available on our cash flow revolver.
Total debt outstanding was $2.7 billion and up as a result of drawing down on our revolver.
As compared to the prior year third quarter, ending inventory was lower by $151 million.
As enhance demand and supply delays associated with Covance 19, combined with the increased disciplined and improved process around inventory management, we demonstrated in the past three quarters limited our inventory investment.
We continue to invest in capacity automation and consumer insights to better manage our working capital and are really pleased with the progress this year.
On June Thirtyth, we successfully refinanced our $890 million cash flow revolver with a new five year 600 million dollar cash flow revolver and $300 million of 5.5% senior unsecured notes due in 2030.
Consistent with our comments last quarter based on the seasonality of our working capital we generated substantial positive cash flow in the third quarter and we continue to expect substantial positive cash flow in Q4.
Additionally, we sold approximately 1 million shares of Energizer stock for proceeds of $50 million during the quarter and held just under 3.1 million shares at quarter end.
Capital expenditures were 12.8 million in the quarter versus $13.2 million last year.
Turning now to slide 14 in our plans moving forward, while we have withdrawn our fiscal 2020 guidance. We did want to spend time discussing our current market conditions.
We believe our strong liquidity, which was further solidified in June.
Positions us to weather the storm of the pandemic.
Regarding our capital strategy, we continue to target net leverage of three and a half to four times.
The improved this metric sequentially as we ended Q3 with net leverage of just below four times and expect it to end the fiscal year at the midpoint of our target range.
Additionally, we continue to to temporarily suspended our share repurchase program.
As mentioned earlier, we're also planning for incremental advertising investments in Q4 and beyond Randy plan to provide more details by business unit.
And lastly demanded July remains strong net sales across all business units.
Now to Randy for a more detailed look at our operations.
Thanks, Jeremy and good morning. Thank you all for joining US today My comments will focus on our operational performance in Q3 progress on our global productivity improvement plan and a review of each business unit to provide you more detail on an underlying performance drivers in Q3, we continue to face coping 19 related challenges, namely supply disruptions.
The threatened our ability to meet the increased demand from our customers for our homes central products I will detail. These by business unit in a minute, but first the safety of our teams has been our Paramount concern for this quarter as we responded to the koeppen 19 impacts on our supply chains globally.
The challenges were very throughout the different regions of the world. We have greatly benefited from a global governance approach of our Kobin 19 response team that's insured solid implementation adoption of strict safety standards to protect our people and minimize chance of Coca 19 spread within our facilities.
While ensuring that we abide by all government mandates.
These are similar challenges to what we faced in Q2, however, the operating environment improved across each of the business units throughout the quarter production rates have improved sequentially over the past few months and today all of our manufacturing distribution facilities worldwide are open and operating at or above the output levels from before the pandemic, we're working diligently.
Replenish inventories and safety stocks. This is really critical because we have a very strong order book in each of our businesses.
Let's dive into the Q3 supply chain performance of each business unit and tenants and cover the expectations moving forward.
Hi recall that starting at the end of March government shutdowns and reduced capacity mandates related to co. The 19 impacted two of our plants in Mexico and one in the Philippines. These government mandates continued into late May and limited a production capabilities and as a result, clearly impacted our security category sales in Q3.
In response to these disruptions or team successfully ramped up production of third party partners and moved work to other internal manufacturing locations where possible.
However, these efforts were not quite enough to offset the impact of the temporary shutdowns. The good news is after receiving the green light to reopen each of our facilities from these governments are teams have now increased capacity back to pre cobot 19 levels or above and we continue to push for further increases in capacity in these plants that are using alternative locations to help accelerate our.
Recovery.
As you May recall earlier this year in Q2, we had a few cases of cobot 19, among employees at our home and garden facility in sandals, and we took swift action to mitigate potential spread after temporarily shutting down clean the facility reviewing safety measures. We reopened successfully since then we had redesign production processes to adopt to new.
[music] staffing additions that enhance worker safety. The facility has fully recovered to pre nine Tobin 19 outfit rates and it's running hard to address consumer demand and retail orders, reflecting strong Pos levels and an extended selling season.
We're on a personal care after a slow sales start in April we rebounded with very strong stronger than expected demand starting midway through the quarter. This positively impacted sales and lowered our supply levels, which were already straight from the shutdown of Chinese suppliers in Q2.
We expect inventories of our finished goods to return to more normal levels across most all categories by the end of Q4.
Turning to slide 17.
As you heard me my supply chain review, we continue to benefit from stronger consumer demand for home essential products as a company. We believe we are gaining share across most of our major categories as David highlighted earlier, our commercial teams continue to adapt to the shifting consumer environment by prioritizing our marketing efforts to our best performing brands and well stock price.
Tying the benefits to whole life, and enabling consumers to purchase them online.
As a result demand and topline accelerated across each business unit with all but HIV generating solid organic growth.
Demand remains strong so far also in Q4 and while we still have two months ago, we expect strong orders as our recovering supply chains replenished low inventories at many of our retail partners.
Additionally, our digital teams continue to leverage current data to identify consumer trends for new product sales opportunities and create promotional content that appeals to these consumers. This quarter ecommerce grew by more than 44% further acceleration from the 38% reported in Q2.
Commerce this quarter, representing more than 16% of our total net sales as a company.
Now, let's turn to our internal growth and efficiency efforts on slide 18, where I can provide an update on a global productivity improvement plan. As a reminder, the most important aspect of this program is to drive sustainable growth in our products and brands to new capabilities and increased investments in consumer insights R&D and marketing.
To drive that investment we are changing to operate more efficiently and capture cost savings by harnessing our collective knowledge powered resources in key areas that are shown here.
This program continues to be our most important strategic initiatives to transform into the new spectrum brands in the coping 19 challenge has accelerated our progress, especially in our company culture.
Our teams lay the foundation over the past year for partnership in collaboration across the enterprise, but the Kobin 19 pandemic required us to work those partnerships more quickly and effectively across business units regions. It functions. This cultural acceleration will facilitate the delivery of long term sustainable organic growth as we continue to focus more globally along.
And strategies in faster decision, making.
As David mentioned earlier savings from R&D to tip program positively impact each business unit during the quarter and we continue to expect the gross savings to be at least the $100 million annually and if these savings will be at full run rate within the next nine to 12 months much of this savings continues to be invested back into growth initiatives and cuts.
Tumor insights R&D and marketing across each of the businesses.
Now, let's turn to a more detail on performance of each of the four business units.
Starting with H. on slide 19.
Third quarter reported net sales decreased 20.6%.
Net sales decreased 20.4% adjusted EBITDA deep decreased 35.6%, primarily driven by negative volumes incremental costs related to Kobin 90 operating conditions customer demand each of the three categories remain strong and we expect a significant improvement in shipments given our order position and improving factory output as we progress through Q4.
As we highlighted on the Q2 call April demand reflect to certain areas of slowing, particularly new home construction, but since in the macroeconomic environment improved in May and June we expect to sequential improvement to continue into the into the year, albeit still down a bit from prior year.
Additionally, we expect to repair and remodel market to benefit from consumers continuing to focus on DIY projects.
Looking ahead into Q4, we expect net sales to promote primarily benefit from the reduction of high open orders as we work to resolve the supply chain constraints from the third quarter related to the temporary government orders shutdowns. We also expect demand in Q4 and beyond to benefit from our new product introductions and incremental advertising investments this year.
The exciting retail launch of Halo touch our innovative biometric lifeline enabled smart life. It was awarded best of CES in January of this year.
And in addition to the smart key technology and voice assistance capability Halo touch not only offers homeowners and their families a safe b, how to safely lock and unlock their doors from any remote location with internet connection, but it also offers the enhanced AD dollar experience of the innovative fingerprint access technology conveniently, allowing.
Enrollment of up to 50 users, which can be securely manage from the quickset app.
Additionally, we've already invested incremental advertising dollars for the quickset in Pfister brands in the case, a quick set new TV commercials, which we haven't seen in over 10 years began running around the July 4th holiday with a focus on our micro band products, which incorporates anti microbial technology into the coding that less the lifetime of the lock.
The results in a bacteria reduction over 99.9% versus an untreated locked.
These incremental advertising investments or plan to continue into 2021 and initial indications are encouraging with tens of millions of early impressions to improve consumer awareness of this capability.
Not at home and personal care, which is slide 20.
Reported and organic net sales increased 3.0% and 6.5%, respectively, adjusted EBITDA improved 37.4% to $25 million.
Net sales were driven by strong growth is small appliances, partially offset by a moderate decline in personal care connecting with cobot 19 related inventory constraints North American sales in particular grew 14% in small appliances, driven by mask online and discount channels.
EBITDA growth was driven by higher volumes mix favorability productivity improvements, partially offset by foreign exchange headwinds.
Strong growth in the US, Canada, and Asia Pacific and continued growth in Europe reflect the broad based turnaround momentum of our home and personal care business behind the new management team globally line strategies and increased investments.
This quarter, representing the fourth consecutive quarter of year on year topline growth and third consecutive quarter of year over year Bottomline growth.
James targeted proche for both home appliances, and personal care are driving market share gains in helping consumers with at home meal prep and personal grooming needs in today's Kobin 19 environment.
Our team sees growth opportunities across cooking food preparation breakfast preparation as well as growth from shaving room in Q3, and this momentum continue so far in Q4 incremental advertising investment in Q3 was focused on promoting the new George Foreman smokeless contact Grill, which has already launched at Walmart, which enables can.
Nvidia is healthier meal preparation without the mess and smoke prove stove top cooking.
Early indications are promising in Q4, we plan to extend these investments for our George Foreman spoke was real series, which will expand distribution, both additional models and channels.
We also plan to invest behind some exciting innovations in our Remington brand in Europe, and Asia Pacific, We will be promoting our new hydraulic series, which allows consumers to achieve expert results without any heat damage in the Americas, we will focus on our new wet to style launch, which allows consumers to save time by effectively drying and styling, they're here in a single step.
Our focus on fewer bigger and better products. In this business you are paying dividends and we expect these investments to continue generating returns into the critical holiday period.
Moving to global Pet care, which is slide 21.
Third quarter results represented a record quarter for revenue and profit, which reported net and organic sales growth of 8.9% in 8.3%, respectively, and adjusted EBITDA increased 29.7% growth in companion animal was broad based while double digit growth and aquatic says driven by a surge in glow fish branded.
Slide fish sales, along with very strong demand for aquatic and reptile environments. The systems higher EBITDA was driven by volume growth productivity improvements and positive pricing, partially offset by higher tariff costs.
Q3 represented not only a record quarter, but the second seventh consecutive quarter of year over year topline growth and fifth consecutive quarter of bottom line growth, despite lapping difficult double digit comparisons to the prior year.
Our pet care team continues to build on our global market leadership position in our core categories of aquatic dog chews pet grooming and pet standard odor.
In addition to the already strong fundamentals of this business, we are especially encouraged by all the new pet parents, who have recently entered the companion animal category and all the new hobbyist have recently entered the aquatic Sun reptile categories. These are long term commitments in bode well for the future demand of our products.
Lastly, the pet care team began the integration of the Omega PC acquisition this quarter within our existing aquatic services. This tuck in acquisition is highly complimentary to our existing portfolio with untapped global growth opportunities and is already performing well. Despite the covert 19 challenges to the independent pet channels early in Q3.
And finally home and garden, which is slide 22.
Third quarter reported net sales increased 4% and adjusted EBITDA increased 4.1% strong Pos in the quarter was driven by distribution gains new product introductions.
Category growth and favorable weather patterns net sales grew despite kobin 19 related supply chain disruptions addressing these disruptions, we improved production up a sequentially and worked diligently to fulfill the strong demand while maintaining our focus on employee safety.
Even increase was primarily driven by volume growth pricing favorable mix and productivity improvements despite headwinds from higher manufacturing costs and tariff costs and our decision to significantly increase our investment in advertising in the quarter.
Third quarter, which user represents about half of sales and EBITDA for the year generated growth across each of the three categories in home and garden business, our largest brands all delivered strong performance as consumers spent more time at home and we experienced favorable weather patterns. Additionally, we did and we will continue to invest more advertising dollars to tell our story.
Around spectra site cutter and hotshot.
POS remains strong in July with our key retailers, indicating plans to continue their seasonal supported the category through the lease the end of our fiscal year.
The fundamentals of this business remains strong with solid profitability and high barriers to entry, we're confident that our strong brand equities and our increased investments in product development and marketing will continue to accelerate long term growth rates.
To in my section I wanted to acknowledge another great quarter of progress on our operating culture, and our strategic initiatives and thank our 11000 plus employees for all they're doing to make us proud to be team spectrum now back to David.
Hey, Thanks, Randy Germy, everybody for joining us today.
Given that we've covered quite a bit on todays call.
I'd like to just conclude with a few takeaways on slide 24 think is.
First we believe our results for the quarter and the year reflect resilience and operational excellence.
I think the future spectrum brands is bright with a strong demand outlook and plans to further strengthen our balance sheet and net leverage position as we invest to drive growth.
Third demand for our products accelerated across each business unit during the third quarter as we grew organic sales across most business units. The demand remains strong so for in the fourth quarter.
For while our supply chain was challenged in Q3, we expect output and fulfillment rates to materially improve in the company's fourth quarter.
We believe we are well positioned financially and operationally to weather the storm and we will continue to be laser focused on our employees, our consumers and our shareholders over the long term we want to thank you for your time continued support and we wish you health and wellness as we go forward I'll turn the call back to Kevin.
I really appreciate everyone joining us today.
Thank you David Angie.
Let's dive right into QNX. Please.
Absolutely.
I would like to ask and audio question. Please press star one on your telephone keypad.
Your first question comes on the line of make Modi with RBC capital markets.
Well good morning, everyone.
A couple of questions.
The first is just David just thinking about category growth rates and I know, obviously, you're not giving guidance, but how do you just thinking about a philosophical where category growth rates, obviously prior to the whole situation and how do you think that's going to role going forward.
It's pretty clear and I think I'll leave me pretty surprising how well the business have held up so it's pretty clear it's much more defensive portfolio and a lot of consumer products company Thats.
The staples space.
Probably going to the elevated levels of consumption as we move forward even past the pandemic. So I'm just trying to get your perspective around that particular dynamic and Im just the second just quick question is on the Ha Ha high side did you.
Lose share because I know your main competitor also had issues with production. So I just wanted to understand kind of what happened from a competitive standpoint around out of stocks.
Yes, I know that let's let's stick in reverse order. Thanks for your question Nick It's good to hear from your son Wealso.
That's good.
Look on H., I think quite frankly on on price Pfister.
In our plumbing section I think we're holding our own and in fact.
We we've got some new business coming on line, there and so I would expect us to be able to grow share.
We definitely grew share in or hardware segment and we believe we are we're continue to win there.
On the unsecured I'd, which is our biggest unit.
No question.
Applied disruptions and basically just the inability to get new products through our vertical integration because of mandatory closures in certain countries.
We did suffer.
On an absolute basis, but I would tell you I believe we're holding our own.
And.
Hopefully when we when we talk in 90 days, we'll be able to talk about taking share we really through the global productivity improvement programs.
Again, let me let me back.
The employees of this company or really rising to the challenge now I mean, what's going on here is we've turned returning the culture and people are really embracing the fact that we're not just making goods and services in and around the home and for pets and clean up your yard but.
Most people out there going through a tough tough time, we all are and.
Some of these global calls have been on whether team of really ask everyone to embrace the fact.
We're not just providing good and services were helping make people's lives better helping to enjoy their pets get the yards.
Clean of weeds and bogs.
Secure their premises with the locks and so I just feel in energy and the company right now we're working for a bigger purpose and.
So with the global productivity improvement investments in innovation, new product and now the marketing ramping up the kind of told a story.
The team here around the table with me here in Middleton, Wisconsin, they're really trying to position our our business to take share so I.
I would tell you will holding serve to taking share in most businesses. What I think you'll see if you really fuel young back is when we had supply constraints, we focused on our on our on our top brands, So where we we want to play to our strengths and so.
Mix is helping quite a bit this quarter.
Because we do put money in emphasis behind getting structure side cutter repel.
Quickset Dream bone smartphone.
Our big brands Russell Hobbs Russell Hobbs is doing terrific by the way it in the UK. So we really want to get our big brand equities out their total story and see share growth so were.
We're making progress.
In terms of growth rates I don't want to kind of I would call, but maybe we were kind of a 2% to 3% or kind of category growth and clearly we are seeing elevated levels of that.
But we do see this is a sustainable tailwind.
For the foreseeable future.
Great. Thanks, I'll popping up.
Thanks, Nick.
Your next question comes from the line of Faiza Ali with Deutsche Bank.
Yes, hi, good morning, everyone.
So.
My first question.
Around the economic environment, and I think the only business where.
Wondering how a cyclical business might be in how dependent it might be on the macro environment of the to tie business. So David I'd Love Your perspective in terms of how you're thinking about that business.
To the extent there is economic uncertainty.
Well and then I think with 33% GDP declines, we've got plenty of on uncertain economic activity and.
We expect HHR to grow in this current quarter I'm, 75% of that business is replacement renewal repair remodel type business and we have the largest installed base in the United States of America, we continue to be the market share leader and.
Yes, I mean.
Again, I would ask you all the backup go back six to nine months. This is a company that entered this fiscal year with the challenged offsets $70 million a tariff.
That was the baseline.
And you saw the growth we did in the second quarter I think we grew sales 4% last quarter. We grew EBITDA over 20% in the second quarter was the March quarter, and then over the our boat.
For lack of a better metaphor plowed into the cobot 19 storm and.
I think I think again, all cannot know all credit to the team it's been all hands on Dec everyone's Poundland real hard.
But I think we're navigating the economic uncertainty in.
Cobot 19 environment, very very well and again Thats why my opening remarks, I kind of.
I really want to call your attention dollar frontline workers and our factories in distribution centers around the globe, they're just doing a remarkable job so I.
Again, I think you should take some solace in my comment that are expected to try to grow in Q4, and that's because we restored our supply chain.
Demand remains excellent I.
I think phase II I'd also add there is so different things happening as it relates to housing trends than just the economic numbers that you're seeing right theres very low inventory around the country homebuilder sentiment as strong a lot of people are trying to flee multifamily units to get to their own homes and right now thats looking like good housing start indicators, which is good for.
25% of our HIV business is exposed to that new home starts.
Okay. That's helpful. Just I guess my second question as you know you only have.
Two months left and the yard and it seems like you have a lot of catch up to do in terms of inventory and open orders and.
So I'm curious about your CCAR process with regard to get on not providing specific guidance for the last remaining quarter, even if it.
The range.
So I guess, where do you see the most level of uncertainty just over the next couple of months.
Is it fair question I think the way I would think about it though is obviously in many states here in the us but also in some of the countries. We operate in that there are still a lot of new cases, rising and there's a potential for additional shutdowns and so while that's not impacting Pos for us at this point because it remains strong the reality is our ability to fill those orders could be temp.
Rarely impacted still.
Further closures were to hit us in so we just want to be cautious as it relates to providing that financial guidance, but obviously, we're giving you the trend through July.
Great. Thank you.
Thank you.
Your next question comes from the line of Bob Lubbock.
JMP Securities.
Good morning, Congratulations on strong operating performance.
Thanks, Bob Thanks.
Hi.
In particular I think the margin expansion was really impressive you talk a little bit about it and particularly impact in HPC. So maybe you could talk a little more about the drivers for margin expansion.
And if those levels, sometimes record levels are sustainable or where they should kind of settle out how we should think about margins in those categories going forward.
So Bob this is Randy I'll, let Jeremy jump in with some more specifics, but with regards to Pat We I think we've been talking to you guys for about four quarters now about kind of where they were in the turnaround cycle that business and starting to get steam from the initiatives. We put in place couple of years ago as we started globalizing that.
This is so we've done a lot of work to simplify and focus on the core.
We've done a lot of work of streamlining.
Supply chains exiting in closing excess capacity.
Lots of work there that.
While I'm not saying that record level is necessary is definitely can going to continue at that that rate. This is not something it was unexpected for us we continue to.
See runway ahead of us in that business and that's a business that but all of them are benefiting very well from our initiatives in our GTECH program.
[music].
HPC is a very similar situation.
There was a couple million dollars this quarter related to a tariff catch up that is a onetime benefit that's flowing through but for the most part again.
We're about 18 months into a new management team with a new global strategy, New operating model and that's about the amount of time it takes to create new products and make meaningful supply chain changed so.
We're excited about what's going to continue to happen on margin expansion in both of those businesses.
And I think Bob I'll, just add over time, and we do think there's margin opportunity.
The.
Pip program, thus far a lot of the savings have gone to offset the 70 million or so in tariffs this year and and $50 million. So last year that David talked about but we see opportunity as we move forward and we're also as David mentioned investing 100 basis points worth a margin of 50 basis points, where the margin incremental M&A and Pete.
We expect to drive organic growth in the future, which again should follow the bottom line nicely.
Got it thats, great and I kind of.
Segways right into my next question, which really is.
Maybe talk about a little incrementally more is replaced advertising with the question was how are you positioning the businesses to drive the incremental sales and continue to gain share.
Make this more recurring.
Secondly for HPC beyond the initial kind of stay at home pop that you get ma'am you may have gotten so like what's the opportunity set in front of view on how do you view this.
Advertising to continue to drive recurring purchases.
It's Dave.
The end of the day right. We just we have tremendous products and we are innovation pipeline is strong got a lot of new products coming out the history of the company was was pretty much in M&A strategy driven by me up until recently, we pivoted to organic growth and really investing behind the business and so.
Right now we think we have a phenomenal opportunity. We just launched cutter in sanitizer, we never had hand sanitizer before obviously, we're trying to do the best we can to help our employees frontline workers people in their hospitals around the country, but also our customers now with with our E commerce offering so why not take that opportunity to really Alberta.
Size the product, let people know that the cutter unaided cutter brand awareness, we what we want to spike if we want people to understand that.
Only do hand, sanitizer, but little bit cutters efficacy in terms of protecting you for mosquitoes and other things is fantastic and and so we really want to build share and we're doing the same thing with the spectra saw you hold the power campaigns that you see.
Quickset, we've got US who gets marquee technology that lets you change your key.
30 seconds or loss, we just to get until the story better and so we got microbiome now so genes Cobot 19 were also in Europe, and I'm sitting here in a room with the guys and I've got my clutter hand, sanitizer with keeps brainer Hanzlik look look it's going out of style will wouldn't you feel better micro bond on every during all of your also kills 99.
9% of germs.
Isn't that a great segue to market convey that story and convert people to the to the Halo effect of quickset, which by the way, we just launched as buyer metric block called Halo and we're in we're really front and center with the whole digital campaign. So I.
I, just think spectrum as a phenomenal opportunity to actually convey the message to take share and make it more permanent.
God willing we can get out of the scope of 19, Miss as soon as possible.
But I, but I, but I agree with your point I think I think we can we can tell our story takes year ever bigger portion of the shelf and continue to follow that with innovative products.
That become recurring revenue streams.
Great Congratulations on the quarter, it's really nice to see all the hardware playing out in the operational performance.
Thank you.
Your next question comes from the line Ian Zaffino.
With Oppenheimer.
All right. Thank you very much.
Hi, good to see how.
Well the ecommerce businesses growing.
You may be give us a little bit more color there may be that divisions are doing best there.
How is their share doing online and then maybe like what channels.
On mine is it more specialty versus general ecommerce.
Let me kind of color you could give there would be great. Thanks.
Im going to let.
Randy adjusted book in terms of breaking it out by segment.
Certain competitive data, we were not going to want to Peel the onion, so so deep but.
Ill, let Randy take a swag at kind of giving you some broad strokes, there, but youre not wrong, but we are we're seeing tremendous growth in E com and we're seeing acceleration and Randy you want to fixed up.
Yes, so what I can tell you is that in the quarter. The business units. It performed the strongest in in year on year growth in the conversion there is our appliance business and our home and garden business and that move and the appliance business is quite encouraging to us because a year and a half ago that was an area.
Where we felt like we were really losing ground and so we've put a very specific focus with the brand new team over the last 12 months and that's really starting to pay dividends that as part of our calm ops organization. So we've centralized our E commerce operations across all four businesses to ensure that.
We are applying best practices there so.
Those two businesses have done the best pet again very strong.
Hi, I'm, a little slow this particular quarter, just mainly because of supply constraints.
And then the other thing I would tell you is that might be helpful is that.
North America grew at a little faster pace than than Europe, Although Europe was still very strong.
Okay. Thank you very much.
Thanks. Thanks.
Your next question comes from the line of Olivia Tong with Bank of America.
Hi, Thanks, good morning.
Well.
Yes, Mike.
Hi.
We are doing well glad youre as well.
Thanks.
First question for me. This if you can unpack the loss corporate related sales and profits 100 million sales in 30 million profit a little bit because obviously was a pretty big numbers and the margin implication is quite high so how much of that do you think you can get back.
Particularly like to come back into China sounds like you feel pretty good about the next couple of quarters, but then in home and garden.
Obviously, some supply can you see there are those although sales now like lost because seasonal category or is actually some catch up that you potentially doing that kind of going as well.
So good morning, let US review I would say, it's it's a mixed bag.
Depending upon the different businesses and so in home and garden, obviously, the seasonality we're running towards the tail end of the season, but.
We continue to see strong demand there we are running all out in the supply chain.
We're headed into the month of August that's a very very unusual thing for us. So inventories are relatively low im sure we've missed some.
Consumer takeaway over the course of the season, but the main thing for US is ensuring that we are doing the right things for the health of the businesses. So we feel good about the fact that we're setting up that this has to be very strong for next year. So line reviews are going well.
Relationships with retailers are going well.
Our investment is growing our top brands and so.
We will likely.
Some consumer takeaway that can't be recovered in.
Hi, which was the biggest chunk.
The impact in the quarter.
We had a growth on our backlog of almost $40 million over the course of the quarters Thats just the delta between the orders in Q at the beginning the quarter orders in Q at the end of the quarters. So those can clearly be picked up.
We also think that as the supply chain continues to replenish supply Theres, a fair amount of retailer inventory that we'll continue to catch up but I want to caution you that as we said in the prepared remarks, we probably won't be fully caught up on on that business until we get into the early part of Q1.
Got it that's helpful and then.
Two related questions first.
You guys talked about how you had asphalt solarcity their energize insurance. If you could just talk about kind of your future plans for what's remaining on that slide.
Then comes from quarter.
Good outlook.
Good indication in terms of some of that but since you gave us.
But that sounds like.
Share repurchase still content.
Vaccine on that so obviously you guys were fairly aggressive pre pandemic. So can you talk about what you need to see to get comfortable to these take the buyback now wait until you get to the midpoint of your leverage range at the end of the year below that just if you could talk about okay. Great. Thank you.
Yes, I mean on the Energizer stick just opportunistic obviously March and April were.
Periods of significant financial stress in the markets and.
In conjunction with kind of getting a new cash flow revolver and terming out some debt.
It was leveraged neutral, but it's nice to have a lot of runway I think though is just a good liability management.
And so.
As we look forward quite frankly.
Listen I.
We were aggressive on the repurchases early in the year. This was.
This was the year, we were going to really deliberate quite well in my opinion from the start of the year and we Didnt have coven 19 in the plan.
And so obviously, we backed off for repurchasing shares to kind of maximize liquidity and protect the balance sheet.
I think that if you look at our peer group our stock remains.
Significantly undervalued.
We would like to return to repurchasing.
I personally would like to see EBITDA start to grow here and in the leverage ratio ticked down but we.
We believe relative to our comps that we are very attractive from a valuation standpoint, both on a total enterprise, though to EBITDA basis and on a free cash flow yield basis.
People if they do the math for grow we are we're a double digit free cash flow yield company with an improving outlook.
Thanks, guys.
Thanks, Lou you as well.
Your next question comes from the line of Jim Chartier with Monness Crespi in heart.
Hi, Thanks for taking my question.
Good morning.
Good morning, guys have been increasing your marketing spend for a couple of years now and then another 20 million step up here I guess, how does your marketing spend.
Following the step up compared to your peers, how much more opportunity do you see.
The increase.
The marketing investment going forward.
Yes again this is Randy I would tell you.
Our marketing spend is.
Then relatively flat and relatively low compared to peers sets for.
Up until this year.
And so we had planned on incremental spending this year and Dave is $20 million incremental is beyond that it's that's a that's a number that exceeds just the balance of this fiscal year.
But without getting into actual data, we still have a waste ago. We believe we're still well on on the positive side of the ROI curve, there and we'll be looking to continue those investments weve been very consistent that.
We feel like the key to strategic growth organic growth is insights.
Innovation against those insights advertising against those innovations and so that's.
Thats the recipe across to the totality of the enterprise.
And we're just now kind of getting started and just give a little bit of specifics Jim. So historically the last couple of years, we've been kind of just under 1% of sales the incremental 20 million to David talked about will spins around half of that this fiscal year in around half of it in the first half next fiscal year, but we do expect this year's spend to to get over the 1% of sale.
As Mark.
And I would say the categories kind of Barry.
As you look at peer group sets and some of the data is difficult to get but there's probably still some runway for increased spending as we go forward and show success and return on that investment.
Great and then Randy.
Yes, how impactful, we're kind of corporate related to incremental costs and your manufacturing or over facilities.
And then are you now kind of finding ways to reduce those maybe going forward or maybe past the mom to customers with some pricing. Thanks.
Great question, Jim we're not at the point, where I think those costs passing on our part of our discussions with our customers, but they've been relatively.
Control HRS had a fair amount because of just the.
The extends to which we have shutdowns, but for the most part we've been able to find offsetting efficiencies and productivity.
So those are not going to be material pieces to us going forward into next year I think thats right. I'd also add like a lot of companies our travel RTD costs are down quite a bit in the face of covert 19. That's another thing to think about as you think about a more normalized environment.
Potentially and hopefully for next fiscal year.
Great Thanks, and best of luck.
Thanks, Jim would you Kevin.
Our final question comes from the line of William border with Bank of America.
Good morning.
During the last the last couple of calls it sounds like M&A has not been particularly active.
You're going to be investing more in advertising because it sounds like that's where you see the most opportunity right. Now are you seeing M&A opportunities right now and given the pretty strong demand. Prior products are you guys look.
To be active there.
Yes, I mean with the company definitely took a break from M&A for awhile.
We we want to good organic growth rate of global productivity improvement was a very large enterprise wide program and that's that's still ongoing.
So the work that's been done here over the last 18 24 months is really getting our house in order really supporting our hero brands are our largest categories and really trying to take share. It. So we're we're still does the number one priority is organic growth rate and sustainable free cash flow going forward.
But we did do tuck in acquisition.
In our aquatic business.
And so we're open for business, there never say never anything.
Large but.
I think generally speaking March April even into May the M&A markets were pretty frozen.
We definitely see them loosening up here.
But will again, our focus is driving shareholder value, we want to get the leverage back down we want to get EBITDA growing again, and and we think we're on that trajectory right now so stay tuned.
All right and then just has to follow up.
Always hard to gauge the size of some of them products, but it sounds given the amount of time you guys have started talking about on this call like it may be a greater revenue opportunity than maybe you had in several years I guess one is not the case that new innovation is has a greater opportunity.
And then to do you feel like this 20 million of advertising spending will that be paid for immediately in terms of sales or do you think that this is more brand building and what will be paid for over time.
I look at advertising is typically like you've got to be involved in it for three year kind of payback, which is just not not a long period of time. If you think about what I. If you. If you just if we just take a simple example, we started turning the AD dollars on just months ago on the George Foreman Smokeless girl.
That that business had been kind of flat into a decline for a decade, and we're just seeing PEO us through the roof not just because of cobot, we're taking a lot of market share our dollar market share and girls.
Is up double digit and so we do believe we're seeing a very quick return on our AD dollars, but we are prepared to build that into the model going forward and what we've done is we're using the savings generated by our global productivity improvement prep plant to pay that bill so that we can actually drop the incremental rather.
The new and the contribution margin back to our shareholders and we're in that inflection point Q2, Q3, we would have preferred and up uninterrupted, but good 19 and supply chain side.
But.
We are seeing very fast payback and yes, I think you're right I think we have tremendous opportunity.
To grow Quickset Pfister spectra side cutter all of our big brands have have tremendous growth potential.
And we see that we see that even now dream bone smartphone.
There's a lot of growth under the surface and we want to demonstrate that to our do the investment community over over the next quarters in years.
Great. That's helped me thank you.
I would now like to turn the conference over to David Moore for any additional or closing remarks.
Listen I began just thanks, everybody for joining us.
We believe we're on the right trajectory I really think all of our employees around the globe for for Paddling heart and since Weve reached the top of their will conclude the conference call just want to see thanks for your interest in spectrum brands and we look forward to to talking to you again in the next 90 days stay well everybody stay safe and double.
Talk you soon thanks.
Thank you for participating in today's conference call. You May now disconnect your lines at this time.