Q3 2022 Spectrum Brands Holdings Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good day and thank you for standing by welcome to the spectrum brands fiscal third quarter 2022 earnings Conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you'll need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today, five OCA Dear VP of strategic Finance and enterprise reporting. Please go ahead.
Thank you welcome to the spectrum Brands' fiscal third quarter 2022 earnings conference call and webcast I am Faisel Cotter, Vice President of strategic Finance and enterprise reporting and I will moderate today's call to.
To help you follow our comments, we have placed a slide presentation on the event calendar page in the Investor Relations sections of our website at Www Dot spectrum brands Dot Com. This document will remain there following our call.
Starting with slide two of the presentation, our call will be led by David Maura, Our chairman and Chief Executive Officer, Jeremy Smeltzer, Chief Financial Officer, and Randy Lewis, Our Chief operating officer. After opening remarks, we will conduct the Q&A.
Turning to slide three and four our comments today include forward looking statements, which are based upon management's 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 August 12, 2020 to 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 financial measures on this call reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filings.
Which are both available on our website in the Investor Relations section.
I will now turn the call over to David Maura.
Alright, Thanks vessel good morning, everybody and welcome to our third quarter earnings update I want to thank all of you for joining US This morning I'm.
I'm going to kick today's call off with a discussion on the company's strategic initiatives, then I'll give an update on the current financial performance and the operating environment. We are currently experiencing.
Jeremy will then give a more detailed financial update followed by Randy's operational update with more detail business unit results.
If I could start with slide six and our strategic initiatives.
We continue to execute on our objective to close on the $4 $3 billion sale of our <unk> business to also boy. While this deal has taken longer than originally expected. Both parties are confident and committed that we will close this transaction and we are prepared to do what it takes to fluctuate this deal.
We strongly believe this is a great deal for consumers as it will foster more innovation quality and value and bring increased competition to the industry.
Once completed we will use the proceeds to completely recapitalize, our company pay down debt and materially strengthened our balance sheet.
<unk> continues to perform well and we expect that to continue into the fourth quarter I'd.
I'd like to take a moment to thank Jim Goff and our <unk> team for maintaining not only their focus and strong operating performance in the industry, but also recently winning new business all the while dealing with the current sales process very grateful to this team.
Additionally, we have accelerated the integration of our <unk> acquisition into our home and personal care appliance business, which has been renamed empower brands and recently completed the internal carve out work necessary to separate this business either through a spinoff or another transaction in fiscal <unk>.
23.
These actions further our strategic objective of recasting our company into a pure play global pet and home and garden business.
Now turning to the financial performance and our operating environment.
Once again, we delivered topline growth this quarter, our total sales increased 10%, while organic sales, excluding the impact of FX and acquisitions increased four 4%.
While we entered the third quarter with optimism, having implemented the necessary pricing actions to restore our margin structure and to begin to ramp up our EBITDA generation for a big rebound in our back half we experienced two significant points of pressure during the quarter.
The first was many of our retail customers communicated to us that they were experiencing rapidly changing consumer behavior, particularly in home appliances as well as reduced foot traffic in the home center channels. They also indicated that their inventory positions or as much as 30 to 40.
Percent higher than year ago levels, and that they were going to curtail replenishment orders and in some case cancel orders altogether.
The second was we continued to experience challenging weather conditions in our home and garden business, which negatively impacted consumer demand and retailer replenishment, particularly in our strong repellent category.
These unprecedented negative demand shocks and the unfavorable weather conditions materially reduced our planned sales for the quarter.
This sharp reduction in retail orders led to our inventory one inventory levels being higher than expected, which is inherent leading to higher demurrage and detention costs as well as additional storage costs in the short term.
So in response, we've taken two major actions.
First we moved swiftly to reduce our operating costs by eliminating 17% of our global salaried positions during the quarter and that will drive over $300 million of annualized savings. While these actions are difficult. It is the right thing to do to position our company for the business conditions ahead.
Second we pivoted, our operating strategy to reduce our inventory levels and to run our operations to maximize cash flow instead of reported earnings.
This is negatively impacting our margins and contributed to the shortfall to our original earnings outlook. In addition, we are investing in targeted advertising and promotion to help our retail partners reduce their own current inventory levels.
While these difficult actions negatively impact us in the short term, we are already seeing the benefits and because of these aggressive steps. We believe we can return to our normal operating rhythms and profitability faster.
We are only six weeks away from beginning our fiscal 2023, and we want to enter the new fiscal year as lean from an expense and inventory position as possible.
Additionally from an overall pricing perspective, while we continue to monitor inflationary pressures I would like to confirm that all of our previously planned price increases are now implemented and we are at our targeted inflation coverage levels coming into the fourth quarter.
This is exemplified by our global pet care business, where we have seen adjusted EBITDA margins improved sequentially from Q1 to Q3.
In our HBC business, we have seen higher sequentially monthly profitability just in the last couple of months with in fact, the profit for the month of July in this business greater than it was the entire third quarter.
Given our third quarter results shifting consumer demand and the related retail order patterns as well as our near term focus on reducing inventory we are updating our 2022 earnings framework.
We are now expecting mid single digit topline growth over the prior year in the fourth quarter.
And we expect fourth quarter EBITDA to be relatively flat to the third quarter and very similar to the prior year period.
This would imply a mid single top line digit sorry, this would imply a mid single digit topline growth with a mid twenty's EBITDA decline for the full fiscal year of 2022.
Overall inflation remains high but we are seeing some easing in certain areas, including ocean freight and with certain material inputs, while we expect inventory challenges to persist over the next two quarters as retailers adjust to shifting consumer sentiment, particularly in HBC we.
Believe we are particularly well positioned and our global pet care and home and garden businesses, which are high margin high velocity consumable businesses that have historically been recession resilient.
Despite the near term headwinds our businesses remain competitively positioned and our operating performance as already materially improved since we implemented the actions. Just described we continue to believe that the company hasn't EBIT or earnings power of over $400 million, while the exact mix.
<unk> a business unit currency contribution is difficult to predict we believe the global pact here is the ability to generate greater than $200 million of EBIT per year home and garden can generate greater than $120 million of EBITDA per year and are empowered brands is the ability to generate at least $100 million per year.
If I could now turn your attention to slide seven.
Our capital allocation priorities remain consistent but our short term focus has adjusted to cash flow generation in short we are looking forward to closing the pending <unk> divestiture recapitalizing, our company deleveraging, our balance sheet and moving to a transaction to separate our home and personal.
Care business, we are confident that the public markets are looking to invest and to allocate capital to a more pure play global pet care and home and Garden company.
And these actions should result in a re rating of the valuation of our publicly traded shares.
Before I turn the call over to Jeremy I would like to thank our teams who have worked tirelessly in the face of current market headwinds and have helped to make some difficult short term decisions to prepare our business for long term success now youll hear more from Jeremy on the financials.
Jeremy I turn the call over to you.
Thanks, David and good morning, everyone. Just one quick clarifying comment our head count reduction initiative will result in annual savings over $30 million.
Could turn your attention to slide nine to review of Q3 results from continuing operations beginning with net sales net sales increased 10%, excluding the impact of $29 5 million of unfavorable foreign exchange and acquisition sales of $71 3 million.
Organic net sales increased four 4% from pricing actions related to inflationary costs and improved fulfillment, despite reduced consumer Pos high retail inventory levels and replenishment order headwinds.
Gross profit increased $13 4 million and gross margin of 33, 7% declined 160 basis points from a year ago as price now exceeds inflation.
So it does not cover the margin percent as well as increased emerge and retention costs from higher in house inventory and inventory backup in the supply chain.
SG&A expense of $256 million increased 13, 9% at 31, 3% of net sales with the dollar increase driven by higher transportation costs higher distribution expense due to short term storage costs from high inventory.
Spanned the distribution footprint and higher investment in restructuring optimization and strategic transaction initiatives.
The operating income of $38 7 million was.
It was driven by a one time $25 million reduction in contingent consideration associated with the Tri Star business acquisition offset by the higher SG&A I mentioned.
The increase in GAAP net income and diluted earnings per share were primarily driven by the increase in operating income.
Adjusted diluted EPS declined to 54 cents, driven by unfavorable foreign exchange impact and higher SG&A.
Adjusted EBITDA was $80 $1 million declining due to unfavorable foreign exchange impact and higher costs related to supply chain challenges and higher inventory levels.
Turning to slide 10-Q, three interest expense from continuing operations of $26 million increased $5 6 million due to both higher borrowings on the revolver from funding the <unk> acquisition and increased working capital needs and a higher interest rate on our variable rate debt.
Cash taxes during the quarter of $6 4 million or 700000 lower than last year.
Depreciation and amortization from continuing operations of $25 4 million was $4 8 million lower than the prior year.
Separately share in incentive based compensation decreased $8 4 million.
Cash payments towards restructuring Optimate optimization, and strategic transaction costs were $29 8 million versus $21 million last year.
Moving over to the balance sheet. The company had a quarter end cash balance of $248 million and $307 million available on its $1 $1 billion cash flow revolver.
Total debt outstanding was approximately $3 $3 billion, consisting of $2 billion of senior unsecured notes $1 2 billion of term loans and revolver draws and $95 million of finance leases and other obligations.
Additionally, pro forma net leverage was five four times compared to five two times at the end of the previous quarter as the trailing 12 month EBITDA declines.
Capital expenditures were $20 9 million in Q3 versus $9 $7 million last year, mainly due to higher investments in our SAP implementation.
Turning to slide 11, and 12 and our expectations for 2022 as David mentioned, we're updating our 2022 earnings framework.
We now expect mid single digit top line growth with mid Twenty's EBITDA decline for the full year of fiscal 'twenty two.
We expect $290 to $310 million of total inflation during the year and intend to offset the inflation and pricing and cost management actions.
Depreciation and amortization is expected to be between 115, and $125 million, including stock based compensation of approximately $15 million to $20 million.
Full year interest expense is expected to be between 95 and $105 million <unk>.
Including approximately $7 million noncash items.
Restructuring optimization and strategic transaction cost related cash spending is now expected to be between $85 million to $90 million.
Capital expenditures are expected to range between $65 million to $70 million.
After filing our fiscal year 'twenty, one tax returns, we had approximately $770 million of usable federal Nols coming into fiscal 'twenty two.
And expect to use substantially all of them to offset a portion of the gain on the sale of HHS.
Cash taxes are expected to be between 30% and $40 million.
For adjusted EPS, we are using a tax rate of 25% including state taxes.
Regarding our capital allocation strategy after the closure of the <unk> sale, we intend to significantly reduce our debt levels. After full deployment of the Hai proceeds were targeting two to two five times net leverage for our long term target now.
Now to Randy for a more detailed look at our operations and business unit results.
Thanks, Jeremy Thank you all for joining us this morning, I will be reviewing our third quarter operations results by business unit.
I'll start with home <unk> personal care, which is slide 14.
Reported net sales increased 20% and organic sales increased two 5%.
Organic net sales increased from continued momentum in the garment care and growth in personal care, which more than offset the decline in kitchen appliances.
The third quarter represented the 12th consecutive quarter of year over year topline growth for this business.
As mentioned earlier sales in the U S were impacted by high retail inventories as customer ordering remained lower than consumer Pos how's.
However, garment care in the U S still posting growth as we continue to build on our number one market share position in the U S.
Sales in the EMEA region were negatively impacted by unfavorable foreign exchange rates and pressure on consumers from high inflation and the impacts of the war in Ukraine.
Excluding the impact of FX organic sales in the EMEA region increased over the prior year as personal care and garment care appliance sales more than offset the decline in kitchen appliance demand.
Our Latin American business also continued to show strength and posted double digit growth driven by higher consumer demand and expanded distribution.
Despite macroeconomic challenges our products continued to perform well with consumers relative to our competitors.
In fact, we had a very strong share gain in our small kitchen appliance in garment care category in the U S. Just during the month of June we continue to be very excited about our new product pipeline, which now includes great products like the power <unk> dual neutral sealer, its an innovative handheld food saver and vacuum sealer with a patented <unk>.
<unk> technology.
This product has developed a 17% market share in the vacuum sealing category in the U S and just the short five months period since launch.
The product is also generating meaningful subscription sales of high margin consumable bags used in the ceiling process.
Additionally, following the successful model of our neutral sealer launch we are expanding the use of our new content creation studios to leverage this unique capability across our home and garden and global pet care businesses as well.
These efforts will support our great brands to the rapid creation of digital assets to better tell our story and launched new innovations directly to our consumers.
Adjusted EBITDA decreased to $3 6 million for the quarter. The lower adjusted EBITDA margin was driven by the impact of unfavorable foreign exchange rates and higher inventory levels, resulting in increased short term demurrage and detention costs.
This is somewhat offset by cost reduction measures and cost synergies from the Tri Starr integration.
On a positive note all of our planned price increases are now in place and prices more or less offsetting inflation in the quarter.
While we see weaker consumer demand due to the inflationary impacts of gasoline food housing expense inventory at retail is likely to be the biggest issue for the category in the next couple of quarters.
As such we took swift actions starting in the third quarter to both lower the inventory and reduce fixed cost in this business.
We have been moving inventory out and slowing or stopping incoming orders.
And we have completed the unfortunate but necessary actions of reducing salary positions by nearly 30% in this business we.
We have also ramped up the pace of integration and the Tri Starr acquisition to extract synergies faster given the inventory levels in the retail channels.
As David mentioned earlier, we are investing in targeted advertising and promotions to help our retail partners reduce their current inventory levels. We.
We are monitoring customer inventory levels very closely to understand ordering patterns and will continue to ramp these activities over the coming quarters to help drive higher volume.
We expect the fourth quarter to improve over the third quarter, which will setup HBC for greater stability and cash generation into fiscal 'twenty three.
Moving to global Pet care, which is slide 15 the.
The business delivered another strong revenue quarter with report reported and organic net sales growth of 12, 8% and 17, 3% respectively.
Net sales were attributable to strong growth in companion animal offset by softness in Aquatics.
This quarter represented a record 15th consecutive quarter of revenue growth for the business with strong performance in the Americas and Asia Pacific.
Growth in North America was driven by positive pricing adjustments and product availability recovery as bill rates.
The U S increased each month of the quarter.
This was a result of improved operating execution and choose product availability recovery slightly ahead of our anticipated plan.
Our Latin American business continues to perform well as our brand and category expansion activities are accelerating growth.
Our European sales were adversely impacted by unfavorable foreign exchange rates.
Adjusted for those FX rates.
<unk> sales were flat to prior year, despite pressure on consumers from high inflation and the impact of the war in Ukraine.
On the positive side as we had projected during our last quarterly call. We have completed the implementation of all of our previously planned pricing during the third quarter.
At this point, we are covered against current inflationary cost, except the recent unfavorable FX rates and Russia, Ukraine related cost projections.
While we are encouraged by the fact that most costs are currently stabilized in the aggregate.
The combination of these two factors led to margins steadily improving throughout the quarter, which is a trend that we see continuing into the future we.
We are planning future price increases in fiscal 'twenty three in the EMEA region to offset recent unfavorable FX in Russia, Ukraine award related cost pressures.
On the side of caution retail inventories also rose in the quarter in this business as declines in foot traffic and overall spending, especially among the pet specialty channels is.
Turning to impact the size of retail transactions.
These channels have a higher mix of aquatics, and small animal categories, which appear to be settling back to pre pandemic growth rates.
Additionally, while our year over year sales continued to show improvement, especially in our chews and treats products. We're beginning to see some signs of softness in the overall category Pos we.
We are cautiously watching the consumers' purchase behaviors given the levels of inflation that all consumers are currently dealing with.
That said, we remain encouraged by the category fundamentals, especially given the profile of our business, which is becoming more and more aligned to the consumable products for your past.
The team continues to strategically shape the portfolio in this way.
These product types now represent over 80% of our total revenues so far this year.
Adjusted EBITDA for GPC declined to $49 million for the quarter with all pricing in place by mid third quarter increased freight and input cost inflations were almost completely offset by pricing.
We will achieve our full target inflation coverage in the fourth quarter.
Lower EBIT in the quarter was driven by the unfavorable impact of FX product mix and increased distribution investments as we expanded our DC footprint to support higher revenues, which have grown over 30% over the past two years and continue to support our customer fill rates.
While we are carefully monitoring the consumer purchase behavior and the impact is having on the replenishment orders in the short run.
We continue to be bullish on the categories. We compete in and excited about the long term future of our global pet care business.
The operating fundamentals within the business continued to improve as evidenced by our service levels in Q3, reaching their highest rates in the past two years.
Also we continue to make steady progress on the inventory recovery of our critical juice category.
After almost a year of fill rate issues tied to disruption of supply in Asia.
We are finally, reaching a point where new production capabilities have reached the U S. In a meaningful quantity and we will be fully caught up on our service levels in this area by the end of this quarter.
We are excited to be ramping up our revenue generating activities on choose which had previously been curtailed due to these product availability challenges.
This coupled with our demonstrated ability to drive growth with our category, leading brands and pricing powder recover cost sets the business up nicely for the foreseeable future.
The GPC team remains focused on the execution of our long term strategy, which is centered around inspiring trust through the delivery of unique and innovative products in order to drive demand for our portfolio of leading brands.
Our pet business is a historically recession resistant business with tremendous upside potential and I am confident we will return this business to its prior EBITDA earnings power.
And finally home and garden, which is slide 16.
Reported and organic net sales decreased six 4% and 9% respectively in the third quarter.
Overall net sales were helped by price increases put into effect by the end of the second quarter.
The organic net sales decline was driven by continued unfavorable weather across the U S, where drought conditions and high temperatures have impacted much of the country.
This weather had an adverse impact on pest control, Pos, which further reduced retailer replenishment orders during the quarter.
Within the pest control category, we have seen solid demand for outdoor herbicides and insecticides, but significantly weaker demand for repellents, which is a significant driver of our business.
Retailers also experienced lower foot traffic in home centers in general, which adversely impacted the Pos for cleaning products.
Although we continue to pace with the pest control category overall category Pls remains challenged and retailer inventories remain high this drives further pressure on our sales given that most of the selling season is behind us and retailer purchase behaviors remain unpredictable we are unlikely to recover sales lost thus far in the fiscal year.
We're cleaning we do continue to continue to see gains over prior periods. In fact, rejuvenate Pos was up 15% this quarter over the prior quarter and our top six accounts combined.
Despite the recent loss trends, we actually increased our marketing investment spend over the July 4th holiday.
<unk> advertised heavily to help push more inventory through our retail partner channels.
We're also funding incremental consumer targeted investments throughout the fourth quarter to support our retail partners and extending the season.
Although this will not necessarily result in reorders for replenishment. This fiscal year, we expect to help clear out the channel or our fiscal 'twenty three year.
The impact of these actions reduced our near term operating results that will support the over all long term performance of the business unit.
As for product news, new flipping go delivery system is now available in Bookstop bed bug killer and wheat grass killer varieties and is bringing new millennial households into the respective categories, providing a convenient size in one hand and use that allows consumers to more easily treat their bug and weed problems.
Our cutter graphics Restage was recently recognized as a 2022 American design award winning.
Submission by graphic design USA.
And specter side and cut our advertising campaigns were recognized by <unk> International as two of the most effective marketing campaigns of the year.
In fact since 2020, our innovation and advertising focus on brands like spectra side Hot shot cutter brought more households into the pest control category than any other comparative brand in those segments.
Adjusted EBITDA for the business decreased to $42 $8 million, driven by volume declines and related fixed cost absorption losses.
We also experienced unfavorable product mix from weather and a decline in replenishment orders, which are typically better margin than displays that we shipped earlier in the season.
We experienced higher product costs from raw materials labor and freight in line with our expectations and the impact of price increases more than offset the inflation in our third quarter. However, the favorable pricing was not enough to offset the impact of the volume declines.
Our pricing actions to date are offsetting inflation, we continue to assess further price increases for fiscal 'twenty three to ensure we maintain our margins in this business going forward.
All in all despite the current year category performance, we remain confident in our strategy and we will continue to drive innovative consumer solutions.
The fundamentals of our home and garden business remained robust as our innovative products driven by consumer insights in our strong brands continue to excite our customers and consumers alike.
The category has held up well considering that two thirds of the Continental U S is currently in drought conditions.
As we look forward to fiscal 'twenty. Three we're pleased that we are capturing meaningful distribution gains for next year and our retail customers tell us. They are still focused on both cleaning and pest control for the coming years as these consumable categories become more relevant to repeat high velocity purchases versus categories, such as light bulbs.
We've seen a high retention rate of the new consumers that came in during Covid and believe they will continue to purchase into the future.
We feel confident that the category remains strong long term and our home and garden business is very well positioned for success within the category in the future years.
This segment has been recession resistant in the past.
Outdoor living and gardening, both typically do well in tough economic times.
During the last economic or the last recession, we actually saw an increase in the number of new consumers coming into the category during the financial crisis.
Similar to our global Pet care business, we expect to return this business to its prior EBITDA earnings power soon.
To end my section I want to thank all of our global employees for their strong efforts. During these challenging economic times and for staying committed to our long term strategic initiatives.
Now back to David.
Thanks, Randy Thanks, Jeremy.
To thank everybody for joining us on the call today, given that we've covered quite a bit of material, let's conclude with our key takeaways. If I could ask you to join me on slide 18.
First we continue to make progress on our strategic objective of creating a higher margin faster growing pure play global pet care in home <unk> garden business by continuing to execute on our objective to close the $4 $3 billion sale of our <unk> business to as a boy and secondly by accelerating the integration of Tri Starr into our.
Home and personal care appliance businesses and completing the internal carve out work necessary to separate that business through a spin off or another transaction in fiscal 'twenty three.
Secondly, given the challenging retail environment with multiple key customers actively reducing inventory levels, leading to unpredictable customer ordering and the overall uncertain macroeconomic conditions, we're lowering our 2022 earnings framework as we focus the business on cash generation even.
The expense of our near term EBITDA performance, while lowering the short term earnings framework. We believe we are well positioned to succeed long term because of the strength of our brands. The success of our investments in consumer related innovations and our increased focus on consumable products.
Despite the short term headwinds our businesses are fundamentally strong and solid and we continue to take steps to prepare our business for long term success, we are taking meaningful steps towards improving our fixed costs and reducing our global salaried positions by 17% and we're focusing on liquidating inventory in the <unk>.
Short term to position our business for long term performance. We have also accelerated the Tri star business integration to extract synergies faster, we firmly believe that the earnings power of these continuing businesses is over $400 million in EBITDA as the environment stabilizes.
I want to close by reiterating our commitment to manage the business for long term success I'd like to thank our employees, who continue to work very hard to navigate our company through these unprecedented times I want you to know the future spectrum brands remains bright as we continue to make living better at home and I'll now turn it back to vessel for questions.
Thank you David but.
But we can go to the question queue now.
If you'd like to ask a question at this time. Please press star one one on your telephone.
Our first question comes from the line of Peter Grom with UBS. Your line is now open.
Hey, good morning, everyone. So I hope you're doing alright, but I guess I wanted to ask about.
The return to.
$400 million of EBITDA.
Maybe specifically around these long term targets you provided for each of the segments. So I think Randy you mentioned that you expect to return to normalized levels in global pet care and home and garden and Sharon can you maybe elaborate on maybe what seeing means are you trying to imply that there is.
$200 million incurred GBP $120 million for Atg are achievable in fiscal 'twenty, three and getting back to $400 million really going to hinge on HBC, which seems more challenge or are you kind of saying that this is kind of a multiyear recovery as we think about the appropriate earnings power for fiscal 'twenty.
Hey, Peter It's Dave Let me, let me take it frame it and then the guys skin can fill it and look the reality is Q3, we had a negative demand shock and we pivoted the operating strategy of the company, we've taken out $30 million of costs vis vis head count reductions very painful but necessary.
And we really lowering aggressively the inventory levels I'm trying to get the company basically filed already.
For recession.
Q4 is I mean, just to give you some visibility right and Thats why we put the call as late as we did.
On the calendar because I wanted to have the July numbers in front of me and be able to give you guys. Some comfort as investors.
Q3, you see our reported EBIT of down 20% July for the remaining goes essentially flat.
And quite frankly, we are already run rating back to $200 million EBITDA and Pat as I talked to you this fourth quarter in fact.
The fourth quarter is likely to be the best quarter of our fiscal year.
For fiscal 2022, and the goal is basically to get back on track in fiscal 'twenty three.
Hope that helps you out and the guys can fill it yes, I'd just add Peter and I mean, obviously, it's a little early to be giving guidance for 'twenty three and the economic conditions are moving all over the place week to week and month to month. So I think we've got to watch that closely.
No more than 90 days and we'll report the fourth quarter.
We will try to give you even more clear picture for F. 'twenty three then.
Okay. That's helpful and then.
David I just wanted to ask about <unk> you mentioned the business is performing well Dubon, new investor distribution. I think you mentioned can you maybe help us understand and provide some numbers around that I think we're all.
Hoping that this deal closes, but I think we're also trying to figure out how much EBITDA would really come back to the business.
Transaction were not to close.
Well, the transaction's going to close.
<unk> is performing well and actually better than its competition in the industry. There's no question like all businesses they've had to absorb a lot of inflation.
And Thats hurt their short term performance like all the rest of us but.
They're getting their pricing and.
Look I would tell you that that business in recessionary times is probably a $242 50, EBITDA business and when everything is running rate and pricing is good it's a $300 million EBIT business in.
They are slated to produce let's call. It high 50 60 million EBITDA This fourth quarter.
It's a good business, we're going to close the deal.
Got it that's really helpful I'll pass it on.
Thanks Peter.
Our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.
Hi, great. Thank you very much.
I wanted to kind of key in on the comments on pet Pls softness.
Can you tell us maybe what's driving that is that purely economic.
What areas are you seeing it in high end low end and then also is it maybe more of just the kind of post COVID-19.
Softness.
What youre seeing just across pet in general thanks.
Yeah, Ian this is Randy.
It's really important to understand that.
Across our businesses, we're comping, some really unusual previous year numbers with regards to Pos.
Especially in areas like environments, and equipment, where a lot of folks who are out and adding to their pet families over the course of Covid lockdowns and so a lot of our Pos softness is in those areas of hard goods.
Aquatic environments, where we don't see as many people, adding new pets into their families.
But at the same time.
Most of our portfolio is focused on the consumables as well as to the profitability of the business focused on the consumables and so we're seeing good solid.
Pos in the areas like dog chews and treats and as I mentioned in my prepared remarks.
We've kind of idled that that engine as far as consumer engagement and really trying to drive that business for the last year as we've been facing these supply issues out of Asia and so we're really excited about the fact that we're now back.
And able to drive that business more aggressively.
Yes.
Yes.
And to give you more color right.
That business is mainly this year have been.
Because of Europe , I mean, we've lost a lot of business in the Ukraine, Russia War.
FX is just.
<unk> gone the wrong way and we have a reasonable size European business and then in the North American market we've seen.
Very very good improvement.
But in those markets the higher dollar fish tanks, which are lower margin, but the mix in.
Those sales are just down people.
Can definitely see the consumer being impacted by gas prices food rent and they're just they're not as willing to part with $300 $300.
Fish tanks, so they don't want to part with that money to go buy a durable. So that's the part of the business, it's really going to hit but.
Earlier in the year, we had real supply chain constraints and those are being fixed and so the fill rates are up chews and treats is really the exciting part and again I can confirm to you already.
That business is EBITDA run rate as.
It is almost back to 50 million Bucks, a quarter and that's a $200 million EBITDA business. So we're fixing that fast, but we've taken a lot of pain during the year their input.
Okay, Great and then on.
The HBC spin as youre going through the due diligence any sort of surprises there or anything you feel like you need to do like it doesn't have the scale necessary to maybe spin it off do you need to buy something there.
Any other type of efficiencies you can kind of extract.
That you are thinking about right now.
Yes.
We're definitely not buying anything else there period.
We just added a couple of hundred million Bucks revenue with Tri Starr.
We're getting that integrated.
I suspect we will see a much better earnings profile out of that business already here in Q4, let's talk to you in.
When the earnings come out, but I wanted to get the earnings there going in the right direction the comps get easier.
And then im spinning out something Thats it is.
Really can stand on its own.
Don't want to rule out any sort of M&A.
Because there are other partners there are other competitors in the space that I think we benefit from merging with us and if we can merge with them it.
Take some take some cash off the table.
And rod right. Some upside there I just don't want to rule that out but the carve out work is effectively done.
This quarter I want to again, thank the team for completing that it was called project Tiger internally.
That business has officially ready to transact.
Spinoff is is the one action that is within our complete control and probably the default path for for standing that up on its own.
Alright, perfect. Thank you very much for the color.
Thanks, Dan.
Our next question comes from the line of Bob <unk> with CJS Securities. Your line is now open.
Good morning, Thanks for taking my questions Good morning, Bob.
You're carrying a lot of great color, obviously on the inflation impact from the inventory headwinds I just wanted to kind of dig further into our.
Aside from those issues.
Working on kind of behind the scenes I think you mentioned to an investment in product launches and innovation launches of HBC and Randy mentioned, some shelf space games out of home and garden, maybe just give us a sense of what's going on kind of behind the scenes aside from the big.
Headlines or inflation in inventory to grow next year.
<unk> down that path.
Yes, I mean, Bob.
These kind of challenges on things that have an outside our four walls. I mean, we are constantly working on and in all of our businesses at least a three year product pipeline and giving early as early visibility as we can to our retail partners.
Helped drive the direction, we go in R&D so.
We remain very positive on our new product launches you know Randy covered a few of them in his prepared remarks, but overall they continue to gain traction in retail and with consumers, Yes, Bob I think one of the most exciting things about the <unk> acquisition is the model change that they bring as a opportunity to.
To blend with our more traditional operating model.
And I think David and the entire teams.
Very happy with what we're seeing how fast we're able to integrate there I talked about in my prepared remarks about the.
Neutral sealer and it's just a great product launched incredibly fast by our standards and it's unbelievable that we're able to capture such a substantial market share and that helps us really drive <unk>.
Attention from consumers and also.
Retail partners, but the other thing I mentioned that I don't want to lose sight of this.
We're not just keeping that new capability within the home and personal care space, but we're expanding it out into the global pet care environment as well as the home and garden environment. Both of those teams have been in New Jersey in those in those studios, creating and working on new content to.
To better tell the stories of the innovation, that's coming in those spaces and so.
I don't want to go into all the details on home and Garden Sars New products next year, but we've got a number of great things launching next year and really so excited about the launch for the following year as well.
Okay Super Thank you very much.
Thanks, Bob Thank you Bob.
Our next question comes from the line of Chris Carey with Wells Fargo. Your line is now open.
Hi, good morning.
Great Good morning so.
Good morning.
I'm trying to understand the confidence around.
Some fiscal 'twenty, three snapback I know youre, not giving guidance this morning.
But is that based on what you're seeing quarter to date and that gives you confidence on next year.
Is that based on what Youre seeing is the inventory reduction.
Maybe that gives you some confidence or replenishment orders, perhaps demand is more resilient than you thought or just maybe a love a bit more context on.
This concept of snapback for underlying because I think thats, obviously, an important concept.
Great stock.
Well look, let's just look back over the past couple of years I mean.
Global Pet care.
As.
As already achieved $213 million in EBITDA. It's passed it is right now if you want to look at some of the detail economic forecast cosmetics food and Pat is kind of where you want to be in terms of where consumer dollar.
We're going to flow.
Home and garden is $123 million EBIT business in the past and does very well in recessions in fact grew during the last recession.
Look you have an unprecedented situation going on here, we've moved from a pandemic to factories being closed to supply chain shocks to inflation that the country <unk> seen in.
Since the seventies.
And then all of a sudden this rubber band.
This elongated supply chain and nobody can get inventory and the retailers who are the most sophisticated forecasters in the world.
Come out in May and June and say, Hey, guys, I got 30% to 50% more inventory than I had a year ago.
Youre hitting.
Unprecedented demand shock and so there is no question that we have probably taken actions that are more draconian than our competitors.
But my view of the world as I want to take my medicine fast because I want to get healthy faster.
I'm sitting in a room only six weeks away from ending the fourth quarter.
The reason I scheduled to call it would be so late this quarter as I wanted to give you guys as fellow investors a view and that view is July was basically flat from an EBITDA production standpoint in our remain co businesses that is one hell of an improvement from the reported numbers. We just gave you this morning.
And I'm, telling you that home and garden is run rating north of 100 million block seasonally adjusted and Pet is run rating back to 200 as we sit in this room.
Look we still have to get through several quarters of clearing inventory I still don't know where consumer demand is going to be in six months. There is still uncertainty we still have to put together an annual operating plan and go to our board of directors for 'twenty three.
But we're trying to be as transparent open and honest and our businesses are strong our end markets are strong we are.
We're winning a lot of distribution in home and garden for next year.
But we've got it we've got to advertise right now, which is going to hurt our EBITDA, but it is going to help our consumer or retail customers clear their inventory, that's not going to give us replenishment orders this year, but it's going to clean those channels for fiscal 'twenty three and that's the right thing to do for the business.
Does that help you.
Yes, that's very helpful.
One quick follow up.
I guess I'm also trying to understand a little bit how much of.
This year and what's going on in general it's a function of Youre seeing this change in the demand environment from consumers and retailers and you're taking aggressive actions to work down inventories, perhaps chase loss sales than you otherwise would have done versus.
I think coming at you from a retailer standpoint.
This is probably not a way to quantify that but.
Wonder if you can frame that because I think what youre trying to lay out as.
You're establishing a much cleaner level of inventory going into next year. So you are ready to go on fiscal 'twenty, three and I'm, just trying to understand a little bit. This year. How much is maybe what's coming at you from the retailer side versus what youre doing proactively to clear the decks a little bit.
Then I realised quantitatively.
Probably not a way to say that we're just bringing that look I'll take a stab at it I don't want to mislead anyone in any way there is going to be inventory hangover going into fiscal 'twenty through fiscal 'twenty three starts in six weeks for this company. There is no way I can clear the decks that fast what I'm trying to communicate is I've got all the operating units.
Reporting back to me on deals we can cut to move inventory that are at a significant degradation to EBIT margins I. Just my personal belief is inventory typically doesn't age very well and you want to move it out.
But there is going to still be some of this lingering pain as we go through kind of Q1 Q2 of 'twenty three I just think it's much more manageable I think I personally think retail genius Christmas is kind of a cleared the decks very promotional.
Super aggressive discounting time to declare their own channels, Randy Jeremy Yes, that's right David honestly, Chris we're sitting here with us.
Turning to operations inventory level, you can see on the balance sheet, it's about $250 million higher than it was at the end of last fiscal year, that's not how we plan the year, So youre right Theres still some challenges there.
It probably has a smaller impact as compared to volume to.
What I would view as where we thought we would be 90 days ago.
For the quarter and for the year, but it does have an impact on margins to David's point and it will continue to have an impact, particularly in HPT over the coming couple of quarters.
Yes, Chris another data point out we talked about in the prepared remarks is that because of the inventory there is actually a double hit.
Some material charges and costs associated with storage detention demurrage, so that puts us a double pain on that inventory that will come off at some point in 'twenty three.
Okay. Thanks for the perspective I appreciate it.
Thanks, Chris.
Our next question comes from the line of Olivia Tong with Raymond James Your line is now open.
Great. Thanks, Good morning, gentlemen, thanks for taking my question first I just wanted to follow up on Christine's question line.
Demand.
Amanda.
Stay stable, where it is right now how long do you think it will take.
Clear the inventory realizing a course that.
Mid August probably not going to happen in the next month and a half but.
First half of the year full year.
Yes.
<unk>.
Yep.
If demand stays sort of where it is right now.
Yes, I mean, we don't have perfect visibility to <unk>.
Inventory globally, Olivia, but I think David's right in pointing to the holiday season, particularly in HBC being a very important one I think it will be important for pet to.
Typically is pretty strong seasonally but.
We're also monitoring other things I mean, Europe is in a difficult place right now demand is tough there is a drought the war a lot of inflation.
Currency is hurting a lot of businesses there that are bringing in product from Asia. So I think it's really difficult to say I think it will be at least a couple of quarters, but beyond that to David's point, we can't predict consumer demand six months out.
Got it and then just.
Broadly.
Can you talk a little bit about <unk>, what gives you the confidence that that deal will close because clearly the impact of it in the fall and actions can be transformational, but the steel timeline has obviously been extended so to the extent that you can provide any.
Increment holiday in detail to help us out.
Realizing of course that Theres only so much you can say about it.
I would love to hear your take.
Listen the U S. Regulator continues to review the proposed acquisition, we're continuing to work with them to resolve any potential concerns. So it's actively happening, but I think the biggest thing you should take away is that look you've got two parties here at spectrum brands and as a boy that are absolutely committed and confident to close this deal.
We're willing to do a lot to get it done and I'm, telling you that a true analysis of the business.
And what it will do to the U S. Consumer it is absolutely in the U S as consumers best interest.
So we will invest heavily in bringing innovation quality and value to the consumer and more competition to the space and that is what I believe U S regulator or anybody else would want to see happen here. So that's the confidence level.
Thanks, and then just lastly point of clarification in terms of the salaried positions that you.
Exited.
Can you talk about where they are and it's a particular skew in terms of.
<unk> marketing whatever overhead et cetera.
A little clarity or whether it's just across the board.
Look real quick we took out probably twice as many in as a percentage head count basis. HBC is we did the rest of the organization, but again I want the business to be kind of battle ready.
And we want to be as lean from an expense operating expense standpoint, and inventory standpoint, as we go into fiscal 'twenty, three but it's going to reduce our annual cost by $30 million by more than $30 million in fiscal 'twenty three Randy Jeremy.
Yep Yep.
Great. Thank you very much excellent. Thanks, so much.
We'll take one last question.
Our last question comes from the line of William Reuter with Bank of America. Your line is now open.
Good morning.
It sounds like when you talked about the trade off between near term profitability and clearing inventory.
Certainly some promotional dollars that have been spent in markdowns.
Is there any way to contextualize, how much better EBIT would have been in the third quarter or maybe what how much better it would be in the fourth quarter. If you were not taking these kind of onetime ish pain.
And we can't really qualify or quantify that what I'll say it again is it volume was certainly the biggest driver.
And where we ended up from an EBITDA perspective FX and.
The need to.
<unk>.
Discount et cetera, we're probably also kind of equal drivers.
Degradation in the quarter FX is bigger than you would probably expect when you think about our EMEA HTC and GPC businesses that are essentially.
Buying in dollars through China in RMB, and selling in pounds and euros and so both translation and transaction had a pretty big impact as the dollar went to central parity with the euro.
Got it and then just one follow up.
With EBITDA now being a little bit lower than what we would've expected three or six months ago, you've maintained the pro forma leverage targets. The transaction does that mean that you would plan on paying down more.
Of that than previously you expected.
I think thats unlikely Bill I think.
Where we're sitting here today, we view this as a.
A short term situation.
Certainly if we went into longer term economic recession, we could revisit that decision, but as we sit here today I think we keep our plan relatively attacked alright.
I'd add to that I'm planning for my EBIT as I start to increase as I go into 'twenty, three and that will be the bigger part of that ratio.
That sounds good alright. Thank you. Thanks, Thank you Beth.
Okay.
Alright. So thank you all with that we've reached the top of the hour. So we will conclude our conference call. Thank.
Thank you to David Jeremy and Randy and on behalf of spectrum brands. Thank you all for your participation.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Okay.