Q2 2021 Spectrum Brands Holdings Inc Earnings Call
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Okay.
Yes.
Good day, and thank you free standing body.
Welcome to the Q2, 2021 spectrum brands Holdings incorporated.
Earnings Conference call.
At this time, all participants are in listen only mode.
After the Speakers' presentation, there will be a question and answer session.
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I would now like to handle conference of which are a speaker part of the D kind of bin Kim. Please go ahead.
Great. Thank you Francis welcomed the spectrum brands Holdings Q2, 2021 earnings conference call and webcast I'm, Kevin Kim Divisional VP of Investor Relations and moderator for today's call to help you follow our comments, we placed the slide presentation on the best calendar page in the Investor Relations section of our website at.
E W. Dot spectrum brands Dotcom. This document will remain there following our call starting with slide two of the presentation. Our call will be led by David Maura, Chairman and Chief Executive Officer, Jeremy Smeltzer, Chief Financial Officer, and Randy Lewis Chief operating Officer.
After their opening remarks, we will conduct the Q&A.
Turning to slides three and four of 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 statements.
Outlined in our press release dated May seven 2021, and our most recent SEC filings and spectrum brands Holdings. Most recent 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.
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 Moore.
Alright, Thank you, Kevin and good morning, everybody and thank you for joining us protocol today.
Before I get started I want to take a moment and speak directly to our employees and our partners around the world.
While our work is far from complete our financial results reflect another quarter of strong top and bottom line growth.
And further confirm that we are structuring for growth and efficiency to serve our consumers caused the stakeholders.
I'm also very proud of the progress we've made these past three years, our teams have embraced both our new global operating model and the spirit of our servant leadership culture.
They've also persevered through a global pandemic to deliver excellent and consistent financial performance for all stakeholders.
Because of the view our employees the new spectrum brands has emerged a more efficient focused productive and consistent operating company we.
We will continue to be driven by the values of trust accountability and collaboration to serve our mission as we make living better at all again I think you much appreciation.
If I could out of your attention now turn to slide six our latest financial results for the second quarter reflect another excellent quarter of topline growth and operating leverage.
Our investments in marketing and advertising for our trusted brands were higher in each of our business units and this continues to drive strong demand this quarter. Our second quarter revenue grew 22, 6% as we achieved double digit growth across all of our business units and our E.
Commerce sales grew nearly 43%.
Turning to the bottom line second quarter, adjusted EBITDA increased 28, 8% driven by higher volumes and improved efficiencies from our global productivity improvement program.
Our operating leverage also improved despite higher inflation and incremental investments that we're making in marketing and advertising as.
As we outlined during our prior earnings calls our reinvestment continue to reignite the flywheel of the new product launches, improving our topline growth expanding our margins and driving greater profitability and cash flow generation.
But could I have a one turn now to slide seven.
As has been well documented transportation of commodity related inflation continued to negatively impact our industry.
Consistent with our highlights last quarter, we expect these headwinds the more heavily impact the second half of the year.
Jeremy and Randy will provide additional detail during their prepared remarks, but despite these headwinds our stellar first half performance and our continued organic growth give us confidence and again raising our earnings framework to reflect mid teens net sales and adjusted EBITDA growth.
Adjusted free cash flow of $260 million to $280 million.
We are well positioned going into the third quarter and while we recognize the tough comparisons as we lap last last year's fourth quarter performance. We will continue to focus on disciplined execution of our winning playbook, leveraging our stable manufacturing and distribution footprint and investing behind our strong brands we were.
A main laser focused on capturing growth G. Pip savings and in fact, our teams are targeting incremental savings for 2022.
Andy will highlight that in more detail later on.
Our new operating model and deliberate investments behind our business units over the last few years have built a stronger and much more resilient company and we continue to expect long term growth.
Now moving to slide eight our balance sheet this quarter improved sequentially ending the quarter with net leverage of three two times and over and maintaining over $860 million in total liquidity of our actions earlier this quarter to refinance our debt.
They are expected to reduce our annual interest expense by $18 million of year. As a reminder, we issued $900 million of total debt with the mix of term loan B and a new 10 year, three and seven eight senior notes, which will lower our cost of capital.
As announced in April we are very excited to add the recent acquisition of rejuvenate to our portfolio rejuvenate is a leading developer and marketer of household cleaning products maintenance and restoration products with an incredible loyal following.
We expect the transaction close in the third quarter and this fits perfectly with our company strategy to make living better at home and it adds the fourth category to our home and garden business unit.
Wanted to extend the big welcome to the rejuvenate team as they join our family here at spectrum brands I'm confident in our ability to create tremendous value together.
Turning to slide nine.
Going forward, our capital allocation priorities continue to focus on one allocating capital internally to our highest return opportunities and this includes strengthening of our brands through consumer insights research and development innovation and advertising and marketing to drive vitality.
And profitable organic growth two we plan to return cash to our shareholders via dividends and opportunistic share repurchases.
Third disciplined M&A with tuck in strategic acquisitions that are synergistic and help drive value creation. We will continue to target of net leverage ratio in the three to four times range now Youll hear more from Jeremy on the financials and Randy will give you an update and additional business insights over the you Jeremy.
Thanks, David and good morning, everyone.
Turning to slide 11, and a review of Q2 results from continuing operations I'll begin with net sales.
Net sales increased 22, 6%, excluding the impact of $18 million of favorable foreign exchange and acquisition sales of $26 $8 million organic net sales increased 18% with double digit growth across all four business units.
Gross profit increased 75 kind of $1 million and gross margin of 35, 1% was inline with the year ago, driven by higher volumes in all business units improved efficiencies from our global productivity improvement program and favorable mix offset by higher freight and input cost inflation and last year's rent.
The expected tariff exclusion benefits.
SG&A expense of $262 $2 million increased 13, 1% at 22, 8% of net sales with the dollar increase driven by the improved volumes higher advertising and marketing investments and incentive and distribution costs.
Operating income of $116 8 million was driven by improved volumes improved productivity and lower restructuring costs, partially offset by input cost inflation marketing and advertising investments and incentive costs.
Net income and diluted the diluted earnings per share were primarily driven by the operating income growth and favorability from energizer investments offset by higher debt refinance costs.
Adjusted diluted EPS improved to $1.76.
Driven by operating income growth along with lower shares outstanding.
Adjusted EBITDA increased 28, 8% from the prior year, primarily driven by growth across all business units.
Turning to slide 12 Q.
Q2 interest expense from continuing operations of $65 5 million increased $30 million due to the debt refinancing costs.
Cash taxes during the quarter of $11 $9 million were $4 4 million lower than last year.
Depreciation and amortization from continuing operations of $38 7 million was $2 $3 million higher than the prior year.
Separately share of incentive based compensation decreased from $14 6 million last year to $8 $5 million. This year driven by the change to incentive compensation payout methodology, we talked about last year.
The cash payments for transactions were $3 1 million down from $6 million last year, and restructuring and related payments were $7 6 million versus $12 8 million last year.
Moving to the balance sheet, the company out of cash payments of $290 million and approximately $577 million available on our $600 million cash flow revolver.
At the end of the quarter total debt outstanding was approximately $2 6 billion.
<unk> of approximately $2 1 billion of senior unsecured notes.
$400 million of term loans, and approximately $159 million of finance leases and other obligations.
Additionally, net leverage improved sequentially and was approximately three two times.
During the quarter, we sold off our remaining energizer shares for proceeds of $12 6 million.
Capital expenditures were $16 2 million in Q2 versus $13 million last year.
Turning to slide 13 in our updated earnings framework for 2021, we now expect mid teens reported net sales growth in 2021 with foreign exchange expected to have a positive impact based on current rates.
Adjusted EBITDA is also expected to grow mid teens.
It includes the benefits from higher volumes, our GPS program approximately 11 months of results from the recent arbitrage transaction in global pet care offset by net tariff headwind of about 30% to $35 million driven by the expiration of previously disclosed retrospective tariff exclusions in 2020.
In addition, as David mentioned, we are also now factored in $120 million to $130 million of input cost inflation compared to a year ago.
Fiscal 2021, adjusted free cash flow from continuing operations is now expected to be between 260 and $280 million up from the previous range of $250 million to $270 million.
This includes plans for incremental investments in inventory levels as well as the expected input cost inflation.
Depreciation and amortization is expected to be between $180 million to $190 million, including stock based compensation of approximately 30% to $35 million.
Full year interest expense is now expected to be between 130% of $135 million.
This meaningful step down when compared to our prior range of last year is driven by our successful $900 million refinancing in February of our senior notes due 2024 and partial refinancing of our senior notes due 2025.
On a full run rate basis, as David mentioned, we expect annualized savings of approximately $18 million.
Restructuring and transaction related cash spending is now expected to be between 70 and $80 million.
Capital expenditures are expected to be between 85% to $95 million.
And cash taxes are expected to be between 35 and $40 million and we do not anticipate being a significant U S. Federal cash taxpayer during fiscal 2021, as we continue to use net operating loss carryforwards.
We ended fiscal 2020 was approximately $800 million unusable federal Nols.
For adjusted EPS, because of the tax rate of 25%, including state taxes.
Regarding our capital allocation strategy, we continue to target of net leverage range of three times of four times adjusted EBITDA.
As it relates to our 2021 earnings framework. Please keep in mind, just a few factors.
First we continue to plan for incremental advertising investments of over $20 million in fiscal 2021, as we continue to raise awareness consideration and purchase intent with consumers.
The second recall the Q4 results. This fiscal year will have six fewer selling days compared to the prior year, it's important to recognize this modeling nuance.
Third we continue to manage through inflationary pressures, which are currently expected to be of $120 million to $130 million higher than the prior year.
The fourth adjusted EBITDA is also expected to be negatively impacted by the absence of energizer dividend income.
Now to Randy for a more detailed look at our operations.
Thanks, Jeremy and thank you all for joining us this morning, what kind.
As of today will focus on reviewing each business unit to provide detail on the underlying performance drivers of our operating results and I will also update you on the current overall cost environment.
Yes on our GPS program.
<unk> from our commercial operations team in E Commerce and marketing.
Overall, we continue to see significant benefits from our operating model transformation as well as the addition of new talent in many key strategic roles Q.
Q2 reflected another quarter of exceptional financial results the strong improvements across all four businesses with the <unk>.
Backdrop of elevated demand this quarter reflected generally improved supply chain performance.
Service levels. Despite continued industry challenges these.
These efforts in addition to our continued commercial investments helped drive another quarter of double digit sales and adjusted EBITDA growth.
Outside of any of the specifics of each business.
Starting with hardware and home improvement on slide 15.
The second quarter reported net sales increased 18, 4% organic net sales increased 17, 4%.
The EBITDA increased five 6%, primarily driven by positive volumes and productivity improvements that were materially offset by last year's significant benefit from retrospective tariff exclusions.
Higher freight and input cost inflation distribution costs, COVID-19 related costs and higher marketing investments.
<unk> the last year's tariff exclusions, adjusted EBITDA improved 21%.
This represents another quarter of strong double digit growth within HHS.
The inventory levels are improved and of normalize over the last few quarters demand continues to outpace supply with continued strong consumer demand for our products.
Bodes well for our third quarter, especially as we are lapping last year's government mandated shutdowns in three of our manufacturing facilities throughout Mexico and the Philippines.
We expect continued demand increases throughout the balance of 2021, driven by our new product introductions and incremental advertising investments.
Sales across both the repair and remodel segment as well as the Newbuild channels continued to be strong.
And a quick set business, we are focused on driving demand for microbiome, which incorporates the anti microbial technology on the surface of our hardware.
Also smart key technology, which allows users to rekey their own locks to any quick set of key in about 15 seconds.
Finally, our exciting Halo touch smart lock product, which includes the biometric and Wi Fi enabled technology, along with the voice assist capability through Alexa and Google Assistant.
As an example of the quick set of team recently partnered with longstanding customer Shea homes to begin installing halo touch locks on every new build as the standard home feature.
This and other similar wins with the Halo platform are encouraging as we believe home automation trends will continue to drive sales for our electronics.
Connected locks.
Initially our Baldwin brand, which is the leader in luxury security products launched a new quick ship program. This quarter with a wide array of Skus shipping within five business days dramatically improve the customer experience.
Finally, I'm also pleased to announce of Tim Gough accepted the role of President of <unk> in March Tim is one of our top strategic leaders and most recently served as the head of our commercial operations group.
The captain of the transformational benefits of that team has had on the new SPV operating model and business results.
Tim knows the HHS business very well, having previously served as the chief marketing officer and hold the other supply chain operational and sales leadership roles over the years.
Look forward to sharing more details over the coming quarters as Tim in the Hai team, but to build of our leading market positions the spectrum brands the largest business unit.
And the home <unk> personal care, which is slide 16.
Reported and organic net sales increased 28 zero and 24, 3% respectively.
Adjusted EBITDA more than doubled the $25 4 million.
Net sales were driven by continued strength in the small.
Kitchen appliances, and personal care categories as well as the growth across all regions.
E Commerce sales book pure play and retailer Dot com channels continued to grow at a high rate.
It was driven by higher volumes and productivity improvements, partially offset by increased freight and input cost inflation.
Continued marketing investments.
Q2 represented the seventh consecutive quarter of year over year top line growth as momentum for our home appliances and personal care products continued well past the successful holiday season.
We've seen incremental demand in the U S from recent stimulus spending and our fill rates continue to improve this bodes well for our plans to continue growth sharing and shelf space with our key retailers how's.
However, when modeling this business. Please keep in mind inflationary headwinds within home personal care, we expect our pricing and supplier partner initiatives will only partially offset the second half headwind.
As the result of these factors. We currently expect margin pressure in the second half we will continue working to mitigate the inflation throughout the year and into fiscal 2022.
Focus on 2021 and beyond we will remain on consumer led insights driven new products. We will continue to drive those investments in our brands across more markets than ever before.
Moving to global Pet care, which is slide 17.
Q2 represented another strong quarter of financial performance reported net and organic sales growth of 23, 9%, 10% respectively.
Adjusted EBIT grew 39%.
The growth was driven by both of our Aquatics and companion animal categories with broad based demand across subcategories and channel partners.
Higher EBITDA was driven by volume growth and productivity improvements, partially offset by higher inflation and distribution expenses as well as advertising and marketing investments.
It was also the 10th consecutive quarter of year over year topline growth in the eighth consecutive quarter of bottom line growth as our existing legacy brands and recently acquired brands all performed well in their categories.
Our global Pet team continues to build its worldwide market leadership position in the core categories of the Aquatics dog chews pet grooming and pet stain and odor.
You will recall that we added Omega sea as an acquisition last year to advance our premium aquatics offerings and our addition of the arbitrage pet carrier came earlier this year excellent platform for international expansion not only our dog chews business, but also catches treats and toys.
As we've said before our global pet care team remains confident the 2021 and beyond will benefit from the continued execution of our global strategies, coupled with the very strong category growth fundamentals in particular, we anticipate sustained demand for our high margin consumables, given all of the new pet parents in companion animal.
And all of the new hobbyists, who have recently entered the aquatics and reptile categories.
These are long term commitments and bode well for the future demand of our products.
And finally home and Garden, which is slide 18 second quarter reported net sales increased 21, 4% and adjusted EBITDA increased 22, 7%.
Topline again grew across controls household insecticides and repellents with strong early season orders across all channels.
The increase was driven by volume growth favorable mix productivity improvements, partially offset the advertisement and marketing investments and higher distribution expenses.
We believe both spectrum brands and our key retailers are very well positioned as we entered Q3 is historically, our largest quarter for sales and profitability.
Q2 reflected another quarter of improved production capabilities to meet continued high levels of demand, which results in heavier inventory positions at retail compared to prior year.
<unk> is just starting and much of the U S, which kicks off our selling season for controls and repellents, we're seeing good early quarter Pos performance.
The weather, thus, the resulting pls performance in our peak season remains an unknown variable.
We're very well positioned to maximize our results this year, despite ongoing challenges from input and freight markets.
They are also very excited about the anticipated acquisition of rejuvenate the leading household cleaning maintenance and restoration product company. The juvenile has a loyal customer following has generated impressive top and bottomline growth product categories centered around the floor care as well as disinfectants and kitchen and Bath last year.
Net sales were over $60 million, the growing sales and margins over the past three years, we are confident in our ability to capture operational and revenue synergies.
<unk> had strong EBITDA margins customer alignment with our existing channels.
The transaction is planned to close during the third quarter, and we look forward to applying our strength and manufacturing marketing and sales to further strengthen the rejuvenate brands, particularly within Underpenetrated sales.
Yeah.
Our continued A&P investments this quarter consistent with our strategy.
More resources to tell our story from brands, such as spectrum cutter Hot shot and Equallogic.
Of the incremental research all of us to deliver even more new and innovative products.
We believe these actions will further enhance our mission and recognized market leader in providing consumers the best solutions to conquer nature of challenges and enjoy life.
As possible with our distinctive combination of brands formulations registration's supported by efficient manufacturing of strong customer relationships.
Fundamentals of this business remain very strong with solid profitability and high barriers to entry.
<unk> and our strong brand equities the increased investments in product development and marketing will accelerate long term growth rates.
Now, let's turn to our internal growth and efficiency efforts with our global productivity improvement program, which is on slide 19.
As David mentioned, we remain laser focused on the execution of our key initiatives in this program as Q2 delivered productivity enhancements across all business units.
We remain resolute on using the savings to reinvest back into the business to deliver long term sustainable organic growth.
This program continues to be our most important strategic initiative as we transform to a new global operating model.
Our F. 'twenty one savings are running ahead of previous projections and we are now raising our total gross savings target of $150 million to at least $200 million by the end of fiscal 2022.
Confidence in raising the target is driven by strong performance from our teams and expanded scope of our existing program initiatives.
As David and Jeremy noted earlier inflationary headwinds of second half weighted did begin to impact our business in this quarter.
The call last quarter, we indicated these headwinds were 70% to $80 million higher than we had originally planned for the year.
Other words of $100 million to $110 million higher than fiscal 2020 levels. Please.
Based on current rates as well as our improved expectations for topline growth for the year.
Inflationary headwinds are now expected to be $120 million to $130 million higher than fiscal 2020 levels.
During the quarter the.
Actively address these headwinds with the coordinated and consistent strategy utilizing many of the tools developed through our drip program.
We are working in concert with our supplier partners to offset the inflation and additional mitigation actions in many areas such as ocean freight and supplier management.
The greed upon price increases with our retail partners are going into effect other than Q3 and are expected to continue to step up during Q4.
Additionally, we anticipate further pricing discussions of being necessary in the back half of the calendar year.
We believe at this point of some of these inflationary pressures likely temporary nature may begin to moderate in fiscal 2022.
As Jeremy alluded to earlier. These headwinds are currently included in our earnings framework for the year, we will remain vigilant with our operating discipline to maximize the long term performance of our brands as a result of this.
Finally, the commercial operations team continues to drive impressive results. This quarter E. Commerce grew by nearly 43% and represented more than 16% of our total net sales.
Additionally, our digital teams continue to leverage data for the early identification of consumer trends the seed new product and sales opportunities.
The promotional content appeals to those consumers.
And my section I wanted to knowledge of another sensational quarter of progress on our operating culture, and our strategic initiatives and to thank our more than 12000 employees for all they are doing to make us a better faster and stronger spectrum brands.
Now back to David.
Great. Thank you Randy Thanks, Jeremy Thanks, everybody for joining us today.
Earlier this year at Cagny at the Investor Conference, we shared our spectrum brands mission.
As we make living better at hall.
As I shared earlier, we are a more efficient focused productive and consistent operating company.
Given that we've covered a lot of the call, let's conclude with the few takeaways on slide 21.
First of all of our second quarter financials reflect another excellent quarter of topline growth investments in marketing and advertising for our trusted brands or higher in each division, which helped drive double digit top line growth across all of our business units.
Our second quarter financials reflect another quarter of operating leverage with adjusted EBITDA, increasing 28, 8% from the prior year with growth across all businesses.
Thirdly, our balance sheet improve sequentially ending the quarter with net leverage of three two times with over $860 million in total liquidity.
Additionally, our successful debt refinancing actions this quarter are expected to drive of materials stuff down in our interest expense.
I again want to thank all of our employee partners.
From our frontline workers in the factories to the distribution centers to the many other teams around the world that have been working from home I am extremely grateful for all of the sacrifices you have made the navigate our company successfully through these challenging times. Thank you again for your time and for your continued support.
Now ill turn the call back over to Kevin for any questions that we have on the line. Thank you David Francis Let's just dive right into Q&A.
Alright.
As a reminder to ask the question you will need to press star one on your telephone keypad.
The majority of your question. Please press the pound key.
The standby, while we compile the Q&A roster.
Your first question comes from the line of Nick <unk> from RBC capital.
Your line is now open.
Thanks, Good morning, everyone.
Yes, Paul.
Hey, How're you doing.
Couple of quick questions just on the <unk> program.
The increase can you just provide us any detail on kind of how.
Flow through will be on the rest of the share but also next year. Just so we can understand how to think about the modeling the months of one point and then.
Rejuvenate in in your guidance all of unclear. If you guys have included that in your actual framework.
Go ahead, Jeremy yes, so net given the we don't have.
Pinpoint in terms of the timing of closing on rejuvenate. So we did not included in the current earnings framework.
And on the first question I'll start maybe Randy will have some more color I think we talked about as we started the year.
The incremental $60 million in savings from GPM.
Most of which we expected this fiscal year on top of the $90 million and we'd already had as we started the year.
Randy mentioned, we're a little bit ahead of that so I think we'll be a little bit more than that 60. This year with the rest of the increase flowing into next year again, we talked about it a little bit better savings on existing initiatives and adding some additional scope Randy if theres any color you'd want to add.
And I think that covers it well.
Nickelodeon of little little heavier maybe this year the next but.
Thanks, Jeremy covered it.
That's excluding that's growth so that's excluding the inflation that we're experiencing.
And then just one question Randy or maybe David can answer book as well the housing market, obviously its been all of them.
While it looks like.
Inflation in terms of home prices has gotten pretty pretty high and there are some concerns about portability I'm just curious kind of the spectrum brands take home on the on that end market.
Look my view on that <unk> been talking to a few of communist during the during this week as we prepared for this.
Public earnings call.
We continue to see strength in the housing sector.
And quite frankly, I think the new administrations policies.
We're going to move cash flows.
Quite frankly to the customer base that we have in spectrum brands kind of across the board.
Yes.
The housing inside of good run but.
But I think the.
I think what.
This was a couple of components here I think during COVID-19 people have expected hey, there's a lot of pull forward in the business like ours I would say at this point in time, what we've talked about in prior calls is there is there is some real stickiness.
That is going to benefit businesses like spectrum brands for a very long time.
We've talked about pet adoption that sort of material commitment with a lot of duration of buying a house with the yard moving to the suburbs.
People generally the first thing they do is change the lock and so our hardware division is really of the R&R the renovation business replacement business.
That 70, 75% of our business and.
Quite frankly, we continue to see a lot of homebuilding activity.
Particularly sunbelt other places.
Yes, I've been personally the some of these sites and they are sold out per year or two years, but theres a lot of shovels going into the ground. There is a lot of projects going on.
And we quite frankly are pretty bullish because we've strengthened our management team. The we're upgrading talent there we're launching a lot of new products in that hardware division.
And so we are of very constructive outlook.
All in all for Hh.
Over the next 12 to 24 months.
Excellent I'll pass along thanks, guys.
Thanks, Nick.
Your next question comes from the line of Chris <unk>.
From Wells Fargo.
Your line is now open.
Hi, good morning, everyone.
Good morning.
Morning, Chris.
I wanted to pick up on that line of questioning.
But perhaps from.
The bigger picture perspective, right. So it sounds like.
You think <unk> can continue into fiscal 'twenty two in other words that were out of new base.
I Wonder if you could maybe just talk to maybe the broader portfolio and the <unk>.
Types of things that you think might be helping you know, which wont necessarily help you in fiscal 'twenty two stimulus checks for the appliances business comes to mind.
Pat seems like is that a new base.
So would you expect to grow off of the off of this new base you are seeing some strength in areas of Quad X, which is not typical companion animal makes sense to me.
Garden that makes sense that you have new home and.
And you wanted to take care of your bond debt.
And everything associated.
And I guess, what I'm, what I'm getting at is.
This year has just been so strong so far and I.
Inc.
Is there going to start looking at the fiscal 'twenty two and if you just think about the division that you think can sustain growth or the specific businesses and those that might reverse in and basically whether you think you can still deliver organic sales growth off of what is going to be of a pretty typically strong base of this year, so any sort of a broader portfolio of.
Perspective would be very helpful.
Look I'll be very blunt I think this is what wall Street has wrong I think wall Street is projecting very flat numbers for us in the next two three years.
And I don't see that.
And your comment around stimulus checks is a good one.
It's almost like the direct injection into a vein it impacts the ecosystem very fast and so youre not wrong when stimulus checks go out we see big Big Pos in certain sectors like our appliance unit.
But if you look at what the current administration is proposing in both the family plan and the infrastructure plan.
It is effectively a redistribution of cash flows to our very consumer base.
So.
Look.
I believe that the other structural change here is that as we deal with going back to work.
Through the summer into the fall.
Not everyone is going to return to work, there's going to be a lot more flexibility in the work force in this country.
And people are going to continue to work from home part of the week and they want the at home to look good and Thats. The exact reason why you see aquatic sales going up when they did in the past because.
It's the beautiful thing to have in the house Thats helps relieve stress the kids love it.
And so I do think there are some real structural changes that have occurred through this pandemic period and then as you go into this new administration's policies.
When you dig into it I think look I think the next three to six months of the economic data is going to look a little crazy.
You've got very easy comps on inflation, because last year of factories were shut down and you didn't.
Economy was debt.
You've got stimulus checks going out now you've got tight supply people are coming out of the homes will also be among the is going up.
But <unk>.
Depending on what you think the chances of an infrastructure bill passing on and the family Bill Patterson.
These are these are real movements of cash overtime grant to the 10 year period.
That are going to put money in the pockets of our main consumer base and.
So we'll see.
I'm not a politician I'm certainly not in the economist.
But I think that.
We believe the.
Not only are we taking share of not only building a much healthier durable resilient company.
But we've made a lot of we've done this team of 12000 people.
<unk> done a lot of very hard work.
To reposition ourselves.
<unk> of players wants to be number one we don't want to be number two any more won't be number one we want the best R&D, what the best innovation, we want the best marketing.
It's a very different culture and it just so happens that that is.
Starting to pay some dividends.
And it's also coinciding with I think some favorable structural dynamics that will sustain our growth well past this year.
Okay. Thanks, Thanks for that and then just as the.
The follow up.
David you certainly have a long history and track record with the deal.
I Wonder if you can just provide a bit more perspective on on the rejuvenate acquisition certainly cleaning out of the had a good year.
In 2020.
And just how youre thinking about delivering.
Delivering growth in this business, whether the distribution opportunities.
Whether taking incremental market share.
Then just connected to that.
The synergy expectations that you think you can get from this business from a from a margin standpoint, and how that how that's factored into your decision process to acquire the business. Thanks for that.
Look I'm going to touch on it but I'm going to hand, it over to Randy I mean look we clearly have.
Nominal expertise core competence in manufacturing liquids.
Household cleaning as the space.
We like we want to be bigger than the <unk> acquisition. The company is relatively small.
You answered your own question of 100%, we can get additional retail distribution.
I think we can innovate the product that we can make the product better.
Quite frankly, I think we are of a lot of stuff on our portfolio. We are of a lot of ideas around innovation, new product launches that will further accelerate debt. So it's a.
It's very much the plug and play with the us tremendous synergy coming into the in the spectrum family.
But it's a growth flow.
Relative to the competition. This is a very small asset.
And if we can if we can be good stewards of it I think it can be of meaningful earnings driver for us.
The next three 510 years, Randy you want to jump at the yes, Chris I mean, David hit most of the key points here, but we really like the brands allows us to jump into a space that we've coveted for quite a while and do it from a position of strength of fits well within our portfolio and our new objectives as David said to the number one in the areas in which.
We compete.
We've got.
The substantial benefits and our selling capabilities and a lot of underdeveloped channels for this business, we've got a lot of opportunities to meld our existing innovation.
The delivery systems formulations et cetera to continue the innovation rejuvenate is demonstrated and we think there's a fair amount of.
The cost synergies associated on the.
Product side that we can continue to drive forward to keep the top line moving.
Okay fair enough. Thanks.
Thanks, Chris Thank you Chris.
Your next question comes from the line of the Caribou Martin <unk> from Jefferies.
Your line is now open.
Good morning, when you guys talked about demand outstripping supply.
Or are the bottlenecks.
And what can you do in the near term to alleviate those.
Yes.
We got the ships anchored offshore that we can't get into court.
So im containers.
Of the stocking boats to volume of containers of fallen in the ocean.
You know you had the Suez issue, we go to the containers on that I mean, it's.
It's an everyday battle.
But we've got our low rates up and we've built a much more resilient supply chain and we continue to serve our customers.
Look I think look I think we're sitting here and we're looking at kind of a.
Think it's transitory I think we solve the bottleneck as we get into the early spring of 2022.
But every day every day is a lot of hard work on the supply chain until then but our our company. Our teams are sourcing teams of our supply chain teams are doing a fantastic job.
And so it's really not there's not an availability issue to our company. Thank God.
It's just it's just higher expense right now and it's going to hurt us it's a headwind we're facing into it.
But I do think the transitory and I do think we get through it as we get into the early part of next calendar year.
Jeremy Randy any.
Currently I think the one of the things that we would point out is that we have a lot of businesses that are pretty vertical in the east.
And the supply chain and our operations are all <unk>.
Running.
At full output based upon the availability of of transportation and some limited components. So it's not an internal issue of mainly as David mentioned, we're working with our providers to get through the global transportation kind of low.
And we see of getting getting better each month each week and.
Anticipated continuing to do so into the fall.
And then when you guys talk of taking price here in the third quarter. We've been hearing the inputs are certainly easier to price, they're always all over the headlines but.
The freight and the shipping has been harder.
Getting that full price and are you seeing the industry volume.
Well, it's the it's a very dynamic situation.
<unk> Bye bye channel by category by business unit, and so I can't give you a blanket answer but I would tell you that we are attacking it from the standpoint of both transportation and trade as well as input costs.
I think all of us feel that transportation ultimately will work itself out over time.
And we're taking some unique pricing approaches there with our partners and we are having.
The success in that in that space. So it's going to continue to be a very important thing for us to manage well for the next several quarters as well as everybody in the space, but.
We feel good about how we're approaching it.
Okay, and then just lastly last year weather Wise garden.
Most of the perfect season.
Is that a bit of a headwind for you guys here in the back half or is just the continued strength of that at home customer kind of overwhelm that.
So the.
The overall dynamic of the category.
Very pleased with I have been in this particular piece of the business for most of my career of spectrum brands in total.
I've never felt better about our ability to compete.
With regards to what the weather impact is going to be on the season.
We'll tell you about that on the November call, because I have never been able to figure it out how the predicted at this point. So our strategy is always to go in.
In the best position, we can to win the game the ends up being one of the field and I feel like we are poised to do that extremely well.
Thank you very much guys I appreciate it.
Thanks Kurt.
Your next question comes from the line of price of Aldi.
From Deutsche Bank.
Your line is now open.
Yes, hi, good morning.
Hi.
We wanted to do directly asked.
The question.
You know it seems like as I look at your earnings framework, you're assuming better growth in the back half.
On both on revenue and I am curious if there is of particular segment or category.
That's making you more optimistic and I'm thinking in particular about the HBC.
Were you surprised by those numbers, so I'm curious of how you're thinking about John.
Generally in that particular business specifically.
Yeah, So I'll start and can fill in.
If you look at our first half results Youre, essentially growing 20% ish range of we're implying for the year mid teens of net sales so that implies a slowing of the growth rate.
It's going to be a little bit different business by business given the oddities of fiscal 2020. So if you recall Q3 last year for our <unk> business in particular was very challenging on supply. So they were down 20% plus of Q4. It was the exact opposite where they caught up so it'll be a look a little bit different business by business, but we do expect.
A moderation in the growth rate from the first half rates that we experienced in the earnings framework.
As it relates to HCC.
Fairpoint, obviously, a very good quarter frankly higher than we expected as we started the quarter.
The Pls is continuing to be good David and Randy both mentioned some benefit from from stimulus likely in there as well and.
And perhaps some benefit frankly from people starting to go back to work are starting to travel again, particularly in the the Remington areas of groom and chase.
Okay. That's very helpful makes sense and then I guess your comment around Adobe Giovanni brand loyalty and just.
It's making the is the wonder and think about your existing brands I know you've talked about reinvestment.
And I'm curious if there's any brand metrics are any of that.
We've seen the great sales right, but.
Anything underlying that can you talk about whether it's the loyalty or just any other brand metrics that you can share around sort of where you've seen the most improvement I guess over the last couple of years.
So besides the.
Probably we don't want to get into the specific metrics, but I can comment that we watch them very closely and across the board, we're seeing positive responses to our reinvestment strategy.
And we're using that on a monthly basis to continuously adjust and.
And redirect the flow of investments.
And right now the the great news is debt.
All categories all business units are seeing net positive movement.
In awareness consideration trial and commitment.
So it's a really exciting time to be part of the strategy.
Hope that helps.
Yes, Thank you Mike.
Thanks side of it.
Your next question comes from the line of Bob <unk>.
From the CG Securities.
Your line is now open.
Good morning, congratulations on another great quarter.
Bob.
Yes, I just wanted to talk I guess, a little more about the the.
Mitigation efforts for the material.
The headwinds in terms of you talked about price a little bit on the supply side can you tell us kind of what Youre doing there and then I guess thinking through the next year in terms of the pricing are these permanent price increases or the kind of surcharges or.
If raw materials and freight normalize how does the pricing of the products change going forward.
Great questions, Bob So what I would say on the mitigation.
It's all about Optionality. So it's really about working with your suppliers of strategic relationships trying to get the most out of that how you can value engineering of products. How you can adjust and other ways that don't impact the value to the consumer but it's also around the optionality for other relationships or other suppliers. The great news for US is that we've been doing nothing but gas.
During and leveraging that data for the last two and a half years. So the biggest piece of our Galileo G. Pip savings that's driving the investment has come from the area of cost of goods sold and so all of the process work that was done behind that to prepare for that and drive that through a very successful project was based <unk>.
Round very detailed data oriented optionality. So we had the playbook ready to go and the organizational muscle memory around all of those activities and so thats whats, helping us with mitigation.
With regards to the pricing you hit on all of the topics were working so we're trying to be very transparent with our retail partners with.
With our.
The investments that we've had and the brand momentum that we have has put us in a good position in these conversations where we're able to go in and work together to try and drive the best outcome for our retail partners in categories and so in areas, where we believe there is transitory costs. We are working on programs with surcharges that would abate.
In more normal input cost areas, we're taking more permanent pricing, but there is no such thing as permanent pricing. So it'll always be a point of discussion that we're having with our partners.
Constantly.
Got it that's really helpful. Thank you and then as it relates to rejuvenate I don't know if its too soon to say or not but is there an opportunity to kind of in source to your St. Louis facilities to manufacture there and if so is there enough capacity or is there additional capital needed for that.
Yes.
Obvious area that we're focused on and we don't know enough about all of the details on the other side yet the deal having not close but what we do know as David said is this is our bread and butter competency for our home and garden business.
And we believe that weather production moves from where it is now or not we believe we are going to have a positive ability to improve the the <unk>.
Quality and the cost structure of that business.
Okay Super Thanks, very much.
Thanks, Bob.
Your next question comes from the line of Ian Zaffino from Oppenheimer.
Your line is now open.
Hi, great.
Yeah just.
Just one more inflation question since you guys, probably haven't gotten enough of them.
Yes.
On offsetting this and typically I guess with Paris, you're usually looking for like a 70% to 75% recovery through pricing maybe of 25, 30%.
Offset from my supply chain price from this is that something similar we should expect net you kind of trying to offset inflation in this environment.
The next may be changed a little bit.
Well I think we're not going to get into specifics on pricing of dollars out there I think.
As Randy said being transparent with our retail partners and approaching it as a partnership approaching it from multi factor of screen surcharge of surcharges price increases being very conscious of the impact on Pos in the brand momentum that we have is the most important thing to us, particularly when as David said earlier, we do expect.
At least some portion of these inflationary issues to be somewhat transitory. So we wanted to be really smart about the impact of Pos and the momentum that we have.
Getting into specific percentages or dollars on.
In this environment is probably not the best thing for us to do Ian.
Okay understood and then.
Maybe asking about the the repurchase authorization you guys announced.
What kind of cadence should we expect.
This is the signal maybe that theres not as many acquisitions out there.
Are they not mutually exclusive just a little bit of color on that book.
Helpful. Thanks.
So we're out of $1 billion program in the past I think we used about $600 million of that was due to expire.
The optionality of being able to buy in our stock and so.
I asked the board to give me.
Another $1 billion to buyback our shares.
Look it's a three year program, but I continue to tell you that even though our stock is starting to react favorably to what I believe is.
A lot of fundamental work to drive long term value creation, it's still I believe our stock is undervalued right now and.
Our company is starting to generate higher and higher levels of free cash.
The external acquisitions remain pricey.
And.
It's nice to have the ability to.
The volume.
The 300 million Bucks the stock of the year hypothetically or more so.
Look we'll let you know after it's done.
But we want to manage our leverage in this context, we've got a couple of tuck ins, we need to close and the great.
And.
As I look out I think our share price is very attractive for us to continue to repurchase.
Alright, great. Thanks for the color.
Sure.
Thanks Ian.
Your next question comes from the line of Carla Casella.
From JP Morgan.
Line is now open.
Hi, Paul and on your last comments you mentioned that your stock is undervalued I would also argue that your bonds are underrated.
Your broad S&P took you down during the pandemic any conversations you've had with the rating agency and do you have a rating target or do you want to get to double the are investment grade at some point.
Well I agree with you or double B.
Getting the rating agencies degrees of requires a few more follow up calls but.
All of it I think Paul I think is what you see right now is.
Inc. I think on the ratings front, we've got two really good things going on right. We've really got EBITDA on a nice growth trends what were trying to signal is look we want to continue.
The promise and over deliver we don't want to get out in front of our skis, but.
The reality is we can.
We are winning and we expect to keep winning and so we just we've got some we've got some inflation. We've got a few things here in the back half of the year that we want to point out openly.
But we're generating higher and higher levels of EBITDA and I expect that to continue as.
As we go into 'twenty, two and beyond so that obviously drives the leverage ratio down improves interest coverage et cetera. We've also just on the refi, which is materially lower our cost of carry our debt.
And so as that interest expense drops the free cash flow really expands and so I think we've become a more exciting free cash flow story as we get into 2022 as well.
So all of those things.
Created create.
Creative dynamic and positive trajectory for our for our credit profile and then hopefully get the rating agencies to agree.
But yeah.
Yes.
Let's see where we go out of Germany any color, yes, obviously, we have ongoing conversations with the agencies karla and good relationships I think.
Sure.
That's the way or is anybody on the call. If you go back a year ago the agencies in general.
Very very cautious and conservative in the pandemic and so I think the recent actions we've had to move from a negative outlook to positive.
As a good start but I think they.
We're a little bit entrenched in that cautious approach.
Been burned in the past and so we understand that I think like David I'd like operating in the double the world, where we execute more at the.
The investment grade type terms of covenants I think high yield investors understand this really well.
So I think we're comfortable operating where we are.
And just one follow up I know you took out some of your debt or refinance this year.
Got one more piece of somewhat high cost.
Debt in the structure of any thoughts about either for the refinancing or would you just consider paying down with cash and free cash flow.
Yes, I mean, well look we're always paying attention to the markets.
Obviously, you know when something gets closer to the cash.
Premium drop into part of that gets more exciting.
It does appear that the interest rate outlook will remain low.
For a while.
But yes. The current intent right now is to generate free cash flow of pay down debt.
And that is nice that we had zero bank debt in our cap structure before the recent refi obviously, we have some pre payable debt at par, but look your observation is accurate that we still have some paper out there at the high coupon and we can book.
It's a wonderful things to be able to look into the future instead of Jeremy Randy and I can sit around the table and pull another lever to reduce interest expense further so stay tuned in.
But but.
We understand where you're going and we're watching it.
Okay, great. Thanks net.
Thanks Carlos.
From here I would.
I would like to hand, the call over to Mr. Kim.
The closing remarks go ahead great. Thank.
Thank you Francis.
Thank you Francis with that we've reached the top of the hour will also conclude our conference call. Thank you to David Jeremy and Randy and on behalf of spectrum brands. Thank you for your participation.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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