Q1 2023 Spectrum Brands Holdings Inc Earnings Call
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Okay.
Good day and thank you for standing by welcome to the first quarter 2020 true twenty-three spectrum brands Holdings earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session. That's a good question during the session you'll need to press star one one on your telephone you will then hear an automated message advice and use your hand is raised to withdraw your question. Please press star one again.
Please be advised that today's conference is being recorded I would now like to turn the conference over to your speaker today Social Carter. Please go ahead.
Thank you welcome to spectrum brands Holdings, Q1, 2023 earnings conference call and webcast I'm fast O'connor, Vice President of strategic Finance and enterprise reporting and I will moderate today's call.
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, and Jeremy Smeltzer, Chief Financial 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 encourage you to review the risk factors and cautionary statements outlined in our press release dated February 10, 2023, our most recent SEC filings and spectrum brands Holdings'. Most recent annual report on Form 10-K, and quarterly reports on Form 10-Q, yes.
<unk> no obligation to update our forward looking statement.
Also please note that we will discuss certain non-GAAP financial measures in this call a reconciliation 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 sections.
Now I'll turn the call over to David Maura.
David.
Thanks, Russell and good morning, everybody welcome to our first quarter earnings update and I, Thank everybody for joining us today.
Today, I'm going to kick the call off with an update on our operating the operating environment and the company's strategic initiatives.
I'm going to give an update on our current financial performance. Jeremy is then going to provide more financial and operational details, including a discussion of the specific business unit results.
If I could get everyone to turn to slide six.
Our financial results for the quarter demonstrate our renewed focus on profitability financial discipline and cost management.
We are pleased that our first quarter EBITDA exceeded expectations. Despite continued heavy inventory levels at retail weighing on the volumes of products sold during the quarter. This was particularly evident in our HBC business, where several of our competitors got excessively aggressive and salt products material losses in the market.
Place, causing overall sales to be less than expected in the quarter.
This will require us to be even more aggressive in the marketplace around our appliance business in the second quarter and beyond therefore, while our second quarter will be slightly better than our first quarter results. We still expect to liquidate large amounts of high cost inventory at aggressive prices, which will continue to pressure our margins.
In the second quarter.
Based on current sales trends and our current inventory reduction plans, we believe our margin structure will materially improve starting in the month of March we were excited to be only one month away from a profitability inflection point and we expect our profitability to materially improve.
In our third fiscal quarter.
As we anticipated and discussed with you during our last earnings call.
Our operations continued to be challenged.
Are the difficult macroeconomic environment.
We expect the challenging consumer demand environment, and our customer inventory actions to continue.
And as such we have put in place strong countermeasures to offset these pressures, including further price increases and a strategic focus on fixed cost reductions to prepare the business for a more difficult environment.
Our focus on simplifying our business model and reducing cost is starting to pay off as we operate as a leaner organization with renewed financial discipline. In addition, our focus on cash generation also yielded positive results as we reduced our inventory by another 65 million.
During our fiscal first quarter, including H H.
This means that we have now reduced our inventory position by $170 million during the last six months since we have shifted our operating priorities to maximizing cash over earnings and reducing our overall inventory levels. We will maintain this focus on reducing working capital and strengthening our balance sheet.
Throughout fiscal 'twenty, three as we prepare for uncertainty and demand in the near term given the higher interest rate environment.
And lastly, we remain dedicated to our strategic transformation to become a pure play global pet care at home and Garden company.
To that end, we are committed to closing the <unk> sale and expect to win the Doj lawsuit.
As previously communicated we expect to close this transaction no later than June 2023, which will allow us to substantially reduce our debt and to return capital to our shareholders. We are confident that equity investors will look to allocate capital to a faster growing higher margin pure play.
Global Pet care and home and Garden company, resulting in a significant re rating in the valuation of our publicly traded shares.
Now if I could have you turn to slide seven.
For our financial performance.
As I mentioned earlier, our operating environment remains challenging both due to our customers' actions as well as the consumer demand dynamics. Our retail partners remained focused on inventory reductions as their own inventory levels remain higher than prior year.
The consumer demand environment has remained challenged compared to strong COVID-19 related demand growth a year ago, especially for hard good categories, where demand is continuing to normalize to pre pandemic levels.
These market dynamics combined with a disappointing holiday sales for HBC appliance business, obviously put pressure on our top line and resulted in lower sales. Our total sales declined five 8%, while organic sales, excluding the impact of FX and acquisitions declined nine 5%.
While this volume decrease was the main contributor of the EBIT decline in the quarter. EBITDA was also pressured by unfavorable FX year over year as well as the impact of selling down the high cost inventory accumulated during last year.
As a reminder, we started this fiscal year with approximately $55 million of excess capitalized variances on our opening balance sheet that we expect to roll through the income statement in the first half of fiscal 'twenty three.
Proximately 25 million of those capitalized variances have impacted earnings in the first quarter, we expect the remaining balance to roll through the income statement predominantly in the second quarter.
Moving on to slide eight and our high level 23 earnings framework.
Generally speaking inventory at retail continues to appear to be higher than period, a year ago in many categories, but particularly in hard goods. This is especially true for HBC business, where our retail partners are expected to continue their focus on lowering their inventory.
I expect that replenishment orders in our HBC business will continue to remain below us throughout the second quarter and we will see further reduction in inventory through the supply chain in that business.
We will also continue to focus on inventory reduction in the second quarter by driving sales through discounting and promoting our products and our HBC business unit, which will further pressure to margin in that business during this quarter.
Based on this additional revenue pressure, we now expect the top line for the year to be flattish to fiscal 'twenty. Two as a result, we have made further fixed cost reductions and have executed additional reductions in head count across the organization, but with a greater focus on our HBC business, we expect the main.
Our framework for adjusted EBITDA, as a result and grow EBITDA in low double digits.
As I mentioned, we had approximately $55 million of excess capitalized variances in inventory at our opening balance sheet that will roll through this through our income statement in the first half of fiscal 'twenty three based on current input costs. This negative impact to our earnings will be mostly behind us as we enter the second half of fiscal 'twenty.
<unk>.
We are committed to strengthening our balance sheet and generating cash to pay down our debt, we will utilize cash flow from operations cash from inventory reductions and the proceeds from <unk> transaction to pay down debt and reduce our leverage as I mentioned earlier, we are confident that we will receive $4 3 billion.
And cash upon the completion of the <unk> sale.
However, in the unlikely event that the <unk> transaction does not close we expect to have cash flow in excess of $500 million. This fiscal year, which includes the achei breakthrough in either scenario, we expect to be able to decrease our net leverage to approximately five times or less by the end of fiscal <unk>.
'twenty three.
Before I turn the call over to Jeremy.
I would like to thank our teams who are working tirelessly in the face of the current market headwinds, while making some very difficult short term decisions to prepare our businesses for long term success, you'll now hear more from Jeremy on the financials and an additional business unit performance over to Europe .
Thanks, David Let's turn to slide 10 for a review of Q1 results from continuing operations, starting with net sales, which decreased five 8%.
Excluding the impact of $39 6 million of unfavorable foreign exchange and acquisition sales of $67 8 million.
Organic net sales decreased nine 5% from reduced customer replenishment orders as they maintained focus on inventory reduction and.
And from lower consumer demand for hard goods and consumer durables categories compared to last year.
Gross profit decreased $17 $4 million gross.
<unk> of 28, 3% declined 70 basis points from a year ago from the reduction in sales and from sales of higher cost inventory accumulated during the prior year.
Operating expenses of $222 $1 million decreased eight 6% at 31, 1% of net sales.
The dollar decrease driven by the beneficial impact of fixed cost reduction efforts initiated last year and reduced spend on restructuring optimization and strategic transaction costs.
The operating loss of $22 million wasn't improvement from a year ago due to the reduction in operating expenses offset by a decline in gross profits.
The increase in GAAP net loss and decrease in diluted earnings per share were primarily driven by the increase in interest expense offsetting the decrease in the operating loss.
Adjusted EBITDA was $39 $8 million declining due to the decrease in volume and unfavorable foreign exchange impact.
Offsetting by favorable price and the fixed cost reductions.
Adjusted diluted EPS declined to a loss of 32 per share driven by the lower adjusted EBITDA.
Turning to slide 11.
Q1 interest expense from continuing operations of $33 $4 million increased $11 6 million due to a higher interest rate on our variable rate debt and increased borrowing levels.
Cash taxes during the quarter of $6 1 million or $600000 lower than last year.
Depreciation and amortization from continuing operations of $22 6 million was $2 $9 million lower than last year.
Separately share in incentive based compensation decreased $2 3 million.
Capital expenditures were $10 million in Q1 versus $14 $1 million last year.
Cash payments towards strategic transactions restructuring related projects and other unusual nonrecurring adjustments were $30 $2 million versus $35 8 million last year.
Moving to the balance sheet the company had a quarter end cash balance to <unk>.
Third $28 million and $253 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 $91 million of finance leases and other obligations.
Pro forma net leverage was six two times compared to five four times at the end of the previous quarter as the trailing 12 month EBITDA declined sequentially.
Now, let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results.
I'll start with home and personal care, which is on slide 12.
Reported net sales decreased 4% excluding.
Excluding the unfavorable foreign exchange impact of $25 $7 million.
And the impact of the Tristar acquisition organic net sales decreased 15%.
The organic net sales decrease was driven by category decline from lower consumer demand, particularly in kitchen appliances and retailer inventory reductions.
Sales were also lower in personal care appliances, where garment care remains strong and posted growth as post pandemic recovery continues and we continue to win market share.
Sales in the U S remained challenged during the quarter as retailers continue to work down inventory.
Sales were further adversely impacted by disappointing holiday performance in both personal care and kitchen appliance categories.
Competitors were more aggressive with their pricing, which led to loss and holiday placement and Pos.
The EMEA region sales also declined primarily driven by FX and the impact of the Russia, Ukraine War on consumer spending.
Net of FX, the garment care category registered growth kitchen appliances, and hair care categories declined due to higher COVID-19 sales last year.
Okay.
Adjusted EBITDA decreased to $13 $2 million lower.
And EBITDA margin was driven by lower volume.
The impact of unfavorable foreign exchange rates and higher cost of sales as we continue to sell our high cost inventory last year.
Our continued focus on cost reduction measures, including the fixed cost restructuring we undertook during the second half of last year offset some of the EBITDA pressure.
Looking forward to the second quarter.
You need to expect softer consumer demand, particularly in the kitchen appliance category and.
I would expect retailers to continue their focus on inventory reduction.
This will drive further sales pressure in the second quarter as retailers are not yet consistently ordering to Pos trends.
As such we have also maintained our focus on inventory reduction and a further slowdown in some cases stopped incoming orders.
This has already resulted in a substantial decrease in the inventory levels in our HBC business.
We are monitoring customer inventory levels closely to understand ordering patterns. It will ramp promotional activities as needed over the coming quarters to drive higher volume.
Commercially our focus will be to drive fewer bigger better consumer relevant innovations.
That enhance our current market position.
Simplified the operating model of the business.
As a result of this business model evolution.
Taken the unfortunate but necessary action to eliminate additional salary positions to rightsize the cost structure and to prepare for a more challenging commercial environment.
Our business integration is on track and expected to be substantially completed during the quarter.
Let's move to global Pet care, which is slide 13.
Reported net sales decreased eight 2%.
Including unfavorable foreign currency impact of $13 9 million organic sales decreased three 6%.
Net sales decline was driven by a customer focus on inventory management, leading to lower replenishment orders.
This was partially offset by new price increases in EMEA by the impact of pricing actions taken in the Americas last year.
Despite retailer inventory reductions global sales in companion animal grew versus last year adjusted for FX.
The sales decline was directly attributable to the overall aquatics category softness across all regions.
European sales were adversely impacted by unfavorable foreign exchange rates as the dollar strengthened against the British pound and the euro compared to last year.
Adjusted for FX sales increased in EMEA due to growth in the companion animal category, including our dog and cat food business. Despite the decline in Aquatics as we continue to compare to strong prior year aquatic environment sales.
Sales in the Americas region declined across categories and replenishment orders were below Pos due to retailer focus inventory reduction across most channels.
Additionally, we continue to reshape our north American portfolio by exiting less profitable non strategic skus and categories, such as litter and literally accessories and private label has adversely impacted sales.
However, this will benefit us in the long run as we continue to move our sales mix towards higher profit for strategic categories and product lines.
On the POS side, our largest category of choose continues to experience strong double digit growth and we gained additional market share in the category.
However, our second largest category aquatics experienced Pos declines compared to strong prior year sales fueled by new hobbyists had entered the category during the pandemic.
Despite the overall decline Pos in our aquatic consumables category.
The largest segment in our Aquatics business grew nearly double digits and we gained market share there as well.
This is a good sign as it signals that those who have entered and stayed in the category, it's using our brands and products for their aquatic nutrition and care needs.
On the pricing side, we were successful in executing additional price increases in EMEA that we referenced during our last quarter call.
The price increases are offsetting cost pressure from unfavorable FX and energy inflation that we continue to experience in our international business.
We experienced inflation in line with our expectations. We are encouraged by the fact that costs are either stabilized or in some cases are starting to retreat.
On the innovation side, while we are the clear market leader in the cheese category small player in the instant gratification dog and cat treats categories.
It's a great opportunity in this space to leverage our R&D capabilities.
<unk> of our brands and our strong customer relationships.
That is why we are excited about the launch of new dog and cat treat items in our second and third fiscal quarter.
We secured commitments from many of our top customers some products being available for purchase in the next few weeks.
Adjusted EBITDA for GPC declined to $37 2 million.
The decline of one 5 million was primarily driven by lower volume.
Unfavorable impact of FX and the impact of capitalized variances as we continue to sell our high cost inventory from last year.
Our continued focus on cost reduction measures, including the fixed cost restructuring, we undertook last year and incremental pricing actions in the EMEA region are helping to offset most of the FX volume pressure.
We expect to see the first quarter's trend to continue in our second fiscal quarter.
Remain cautious about the poor performance of certain categories within the pet specialty channels, such as aquatic environments and hard goods within companion animal as the rates of new entrants settled to pre pandemic levels.
Despite these short term pressures, we remain encouraged by the category fundamentals, especially given the profile of our business, which has become more aligned to consumable products for your pet represents over 80% of our total sales.
The GPC team remains focused on the execution of our long term strategy is centered around inspiring more trust through the delivery of unique and innovative products in order to drive demand for our portfolio of leading brands.
That business is a historically recession resistant business.
Landus upside potential.
I remain bullish about the continued growth of this business.
Finally, we will look at home and garden, which is slide 14.
Net sales decreased five 2% in the first quarter driven by lower early inventory investments from retailers across pest control categories.
Partially offset by a positive prior year price increases.
Cleaning products registered growth versus last year.
Kris distribution and the benefit of prior year price increases.
This quarter is predominantly focused on preparation and staging for the highly seasonal home and garden business starts to ramp up later this quarter.
We are preparing for a normal season this year based on our discussions with retailers after an abnormally difficult weather season last year.
Timing of order ramp up still remains slower than historical trends.
That said retailers continue to remain positive on the season, despite slower early inventory uptake.
While the first quarter represents a very small portion of the annual consumer activity in this category.
Demand has been gradually improving across all categories. We are experiencing constant Pos growth, surpassing last year's demand in the last four weeks.
Although our season has not really started yet early signs for the year are positive.
<unk> and southern regions of the United States Boding, well for the drought impacted markets.
Retailers have not made significant inventory investments yet we're collaborating with our key customers and remain confident that sales will pick up as the season starts and normal seasonal pass materializes, and our second and third quarter.
Continue to make progress getting strong innovation to the market in advance of this year's season.
All of our key initiatives have either made it to market already or are well on track to be delivered.
Our effective side brand, we now have available the new one shot premium wheat and grass killer.
Product designed for a highly demanding consumer that is willing to pay a premium for superior results.
Traditionally spectrum <unk> is focused on consumers looking for strong results and a great value.
One shop platform allows consumers to find also a superior performance option with the brand They trust.
And on our Hotshot brand, we partnered with top fragrance makers to deliver an exciting evolution for ant Roach and Spider killer aerosols.
New products continue to be extremely effective and now also offer a superior experience as our new fragrances effectively mask that unmistakable bug spray smell, leaving only a crisp linen.
And then an innovation that received high scores in all of our consumer testing.
Adjusted EBITDA for our home and garden business improved by $4 9 million EBITDA increase was driven by prior year price increases and better operational performance during the quarter.
We're also seeing the benefits of fixed cost restructuring and operational cost reductions initiated during the second half of last year.
We experienced higher product costs from raw materials labor and freight in line with our expectations.
We continue to assess further price increases for fiscal 'twenty three.
We maintain our margins going forward.
All in all despite the slower start to the year, we remain confident in our strategy. We will continue to drive innovative consumer solutions.
We are carefully monitoring Pos and watching for the increase of the season draws near that will determine the timing of the ramp up of retailer orders.
We have made strong progress driving agility and speed into the organization to be prepared to ramp up production to meet the increased retailer demand when it occurs.
As we look forward to the balance of fiscal 'twenty. Three we are pleased with our new distribution gains and we remain bullish on the cleaning and pest control categories based on our retail customers focus on these consumable high velocity purchase products.
The fundamentals of our home and garden business remained robust as our innovative products driven by consumer insights with strong brands continue to excite our customers and consumers alike.
Let's turn now to slide 15, and detailed expectations for the rest of fiscal 'twenty three.
We now expect fiscal 'twenty three net sales to be flat to last year with foreign exchange expected to have a negative impact based upon current rates.
We continue to expect adjusted EBITDA to grow low double digits.
Some inflation headwinds, which are offset by the <unk> of current pricing actions and <unk>.
Land further price increases.
Well as additional productivity gains.
<unk> of our cost reduction actions.
From a phasing perspective, we expect the second quarter to be challenging year over year.
Taylors continue to reduce their inventory levels, especially for the HBC business first.
First half profitability has also negatively impacted as we sell through our legacy higher cost inventory.
Turning now to slide 16, depreciation and amortization is expected to be between 110.
$120 million, including stock based compensation of approximately $15 million to $20 million.
Full year interest expense is expected to be between $130 million to $140 million, including approximately $5 million of noncash items.
Cash payments towards restructuring optimization and strategic transaction costs are now expected to be between 60 and $65 million.
Capital expenditures are expected to be between 60 and $70 million.
Cash taxes are expected to be between $30 and $40 million.
Adjusted EPS, we use a tax rate of 25% including state taxes.
And my section I want to Echo, David and thank all of our global employees for their <unk>.
Strong efforts during these challenging times and for staying committed to our long term strategic initiatives David.
Hey, Thank you Jeremy again, thanks, everybody for joining us on the call today.
At this point I'd like to take a couple of minutes and just recap kind of our key takeaways you can find those on slide 18.
First as I've said earlier, our Q1 financial results demonstrate our renewed focus on profitability financial discipline and cost management.
Our operating environment remains challenging our resolve to navigate these headwinds profitably and with financial discipline is strong.
We expect some of these headwinds to continue in the second quarter, which puts further pressure on our revenues.
We have proactively taken additional actions to ensure that we maintain our profitability in fiscal 'twenty three.
As referenced earlier, we are targeting flat net sales, but low double digit EBIT growth for the year, we expect to reduce our leverage by generating free cash flow through improved operating performance and working capital management.
Secondly.
We will maintain our focus on operating a leaner business focused on fundamentals free cash generation and debt reduction built around four key pillars.
First we are streamlining our organizational structure and Reenergizing our employee base.
Second, we're increasing operational efficiencies and limiting risk.
Third we are protecting and deleveraging our balance sheet strengthening liquidity.
Before not least we are transforming this company into a pure play global pet care at home and garden business faster growth and higher margins pro forma.
We're certainly not least we expect to win the Doj lawsuit and to close the <unk> transaction by no later than June 2023, and collect for $3 billion of cash.
I want to close by reiterating that despite the short term challenges I remain quite optimistic about the future of our company, but I believe we are well positioned to execute on our operational goals and generate cash flow in fiscal 'twenty three.
I want you to know the future spectrum brands remains bright.
Continue to make living better at home.
I'll now turn the call back over to Russell.
Russell for questions.
Thank you David.
Operator, we can go to the question queue now.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question press. The star one one again, please standby, while we compile the Q&A roster.
Our first question comes from Bob <unk> with CJS Securities. Your line is open.
Good morning, Thanks for taking our questions.
Hi, Dara.
Very well. Thanks Hope you guys are welfare.
A couple questions I wanted to start with you touched on this a little bit but can you talk about the current inflationary environment and an inflationary impact you're seeing beyond the elevated costs on the balance sheet. So kind of the go forward environment.
You know where it is how does it compare to.
I guess, you know pre COVID-19 pre.
Transportation took off in raw materials took off and where are we now and where is that where is that trending.
I'll give you the broad brush and then Jeremy can drill about some more specifics I would say look <unk>.
Clearly you have permanent and.
Inflated labor costs right across the board right.
The factory floor.
All the way through Middle management.
Freight rates, which continue to really burden the EBITDA in Q1 and will will hurt us in Q2 as well.
They are through their dropped tremendously and so thats why we believe as I.
As I sit here today, we're kind of 30 days away from seeing that inflection point actually flow through the P&L right because the new inventory at these lower freight costs are starting to hit the balance sheet and as we as we turn our inventories a little quicker, we think we'll see that margin uptick.
So and then look I think certain commodities have come off is clearly more capacity in the factories around the world because of the slowdown of growth.
Particularly in the durable goods side.
But.
It's only I guess, the last couple of quarters, and we feel like we've got enough price to kind of offset the inflation, we do see some deflation narrow in certain materials, but freight has been kind of a big one.
But we are we have yet to benefit from that in the P&L and we're hoping that starts in the month of March and then you'll really see it kind of show up hopefully in the third quarter.
Jeremy Yes, I agree with all of that and I would say I think to your last part of your question Bob was around as compared to pre pandemic.
So really across the board everything is still materially higher than it was pre pandemic I mean, I would tell you that our our P&L even at current freight rates is probably burdened by $80 million to $100 million.
Incremental freight as compared to pre pandemic, all materials are higher and to David's point labor I would view it is permanently higher than if you go back three years.
Got it okay Super Thank you I appreciate that and then.
I know, it's obviously easier to get fixated and caught up on both the macro which you kind of just discussing and the Doj timing. So I wanted to step back to and ask you talked about this a little bit can we dig a little more into the company specific variables.
You're focused on this year to grow revenue and margin you talked a little about SK.
SKU rationalization, but just kind of refocus us on the revenue margin.
In your control variables this year please.
I mean look the two big levers that we've been executing on since we've pivoted the strategy starting kind of summer of last year into the fall.
To run the business to maximize cash was to kind of break the back of the ever ballooning balance sheet, which was.
Elongated supply change to try to keep our retail partners happy.
We've made a really concerted effort.
To bring that down and you can see normally we consume capital.
In the first quarter and you see another 60 plus.
$1 million of inventory coming out of the system.
We've pulled $170 million I believe in inventory out of our business in the last six months and we're going to continue to drive that down.
To create cash for ourselves and so we've got we've got the working cap going in the right position finally, and that's something that's within our control. The other big thing that we've done it's quite frankly.
As the tide has gone out from the Covid demand, we've got a materially lower our cost structure and so it's been very painful for our company.
But we've taken quite a bit of fixed cost out of our operating model.
And we continue to be very very disciplined around expense management.
We're trying to get.
Through the second quarter, and then pivot to profitability of the business, we really got to get the P&L going in the right direction getting EBITDA growing again year over year and.
And we believe we will do that by the third quarter.
Obviously, but.
We want to reinvest some of this money into some promotional activity into some discounting and really try to drive that topline sensibly.
And recently I mean.
Meeting with some people were doing quite a bit of work in some of the divisions on DTC channels did.
Digital channels are really trying to get better yields on our investments and make them truly correlated to transactions.
If that makes sense, Jeremy you want to take that.
Sure.
Okay Super Thank you so much.
Bob.
Thank you.
And our next question comes from Peter Grom with UBS. Your line is open.
Hey, Thanks, operator, and good morning, everyone hope you're doing well.
I wanted to ask this.
Hey, Jeremy So I guess I just wanted to ask specifically about the phasing of the year from an EBITDA perspective can.
Can you maybe just provide.
Final point on what you mean by <unk> will be challenged year over year is that kind of as a percentage of sales is that more just in pure dollar terms.
Any color on that would be pretty helpful. And then I just I guess just in that context, the ramp implied in the back half of the year is just pretty substantial. So just can you just talk about the confidence in that ramp and kind of the underlying assumptions embedded in that.
Yes, I'll start Peter and David can follow on with any comments so.
What we're expecting is that we'll see Q2 be down year over year I think we do expect to see it improve.
Sequentially.
But the reality is this year is a tale of two halves with this $55 million of capital variances that we started the year.
90, plus percent of that I think is flushed by the end of Q2, So you kind of got a $50 million.
Benefit in the second half as compared to the first half which by the way.
It's something that all other things being equal would be a first half 'twenty four benefit year over year as well so.
That's a good thing, but it's painful to get through here in the first couple of quarters of this year.
So we're very confident in that.
Thats math, that's in the system, we see those capitalized variances we know.
As they flow out I mean, our assumptions.
We are.
Pretty consistent environment with what we're experiencing in the first quarter for the rest of the rest of the year with the exception of home and garden, right, which we have to account for and predict some level of seasonality, there which is always challenging.
And we've got a partner really closely with our retail channels to make sure we understand how they're thinking about really each month to stage for the season. So there'll be some variability there, but that's kind of transparently, how we're thinking about the year.
We don't have an expectation that we see a strong improvement in consumer demand. This fiscal year I mean I think.
Current expectations for a soft landing are great, but I think we need to be prepared for even.
Even a further level of decline in the macro economic environment.
Great and then maybe just like a follow up on that.
A bigger picture question around the earnings power of the company.
David I think it was back in the summer you kind of threw out a number around $400 million and adjusted EBITDA preferred the company normalized and I know, we're really still in a very tough environment and I guess has anything changed over the last six months or so where you feel differently about the earnings power of the company and then.
I guess, if not have you taken into consideration in the back half ramp in Jeremy's comments around some of the benefits flowing in through 'twenty four I mean, how quickly can the company get back to that degree of earnings power.
Yes, Peter Thank you for that.
I think the only delta.
At the current time is the appliance unit.
That business has materially underperformed.
In the latest quarter and the current quarter, because it's a durable product.
Everybody.
Doctor kitchen with cooking equipment during COVID-19, but a lot of new competition entered the space.
We acquired one of them to bolster our own platform, but.
There's just a lot of inventory and a lot of competition that is flushing product.
Very large losses.
So.
If you dig around and I think youll see that there will probably be some bankruptcies of some of these players over the next quarter or two would be my expectation.
Given what's going on in that space and so look do I think $400 million is the earnings power over manko, yes.
What does that entail it entails Pat getting back to 200 million Bucks in EBITDA.
Requires Pat run rating 50 million Bucks in EBITDA quarter.
Once we get through these capitalized variances, we believe thats very achievable for Pat.
Secondly, it requires home and garden to be at least $100 million plus in EBITDA.
We believe that's achievable.
This year and we believe that we can grow materially above that.
Given our exposure to cleaning and our plans for rejuvenate et cetera. So there's 300 of it and then listen appliances will not do a $100 million in EBIT. This year, but it does have that earnings power potential.
You won't see that probably until.
Fiscal 'twenty four.
And Thats.
That's how we'd laid out I would say look the 400 million earnings power is intact.
Big Big Divot to you're seeing it this year is going to be appliances.
But patent home and garden is the future of where we're trying to take the businesses and once we closed HHR, we're going to look to solve for the appliance unit.
Great. Thanks, so much.
Thank you.
Thank you one moment for our next question. Our next question comes from Ian Zaffino with Oppenheimer. Your line is open alright, great. Thank you very much.
Dan.
How are you guys.
Got it alright.
Alright.
You have the confidence in the deal.
Deal closing with HCA Jai.
How are you guys actually thinking about the cash proceeds and I guess wondering moon by that as we're sitting here.
Deleveraging, probably some buybacks, but you do own.
Basically it would be receiving more cash than your market cap. So.
How do you handle that.
That cash receipt and maybe how do you think about potentially returning that to shareholders.
I'll follow up thanks.
Yeah look we're going to go to trial in April we're going to win a case.
We're going to close the deal in June .
We're going to say if the money gets wired to me on a Monday what are due on Tuesday, Tuesday, probably pay off all my bank debt at a minimum.
I despise our leverage position.
I'm working every day with the teams to drive inventory drive working capital out of the system.
Run the business for cash flows and so that's a big focus.
But again.
We've said for some time and it look there's a lot of distortion here I think what people to Peter's earlier question.
You've got the slack.
In the system between.
POS can be very strong for example, Pos in January is very strong for our home and garden business, but we're not yet seeing the factory shipments we want to see right. That's just retailers continuing to wait.
Turning to burn off a little bit of inventory they had last year and so that causes a lot of distortion to reported numbers.
Until we can get into an equilibrium situation, we're clearly going to get into equilibrium.
<unk> home and garden much faster than appliances, and so that's why you're going to see such a.
Big rebound in the back half of the year as we burn through these capitalized variances.
And we see profitability restored Q3, Q4, but look we believe our stocks materially undervalued I know.
That hasn't meant a whole lot in the last nine months.
The company.
Last year, they did trade over 100 Bucks a share.
And we quite frankly think works out and so it would be.
Really for us to kind of sit on an extra couple of billion dollars.
We will probably call some of our notes.
But quite frankly, while our leverage is too high the liability side of this company is actually an asset in today's capital markets environment, because we have bonds at 4% and less that's a pretty attractive rate to finance yourself. When the two year note is above four 5% so.
We need to keep our capital structure in place payoff of banks buybacks some stock and then.
Look to see what bonds, we take out that's how I'd answer the question today.
Okay perfect.
And then also on the change in the revenue guidance.
Maybe bucket that for us how much of an impact how much is incremental headwinds that youre seeing.
And then when we get on to the EBITDA line, how much of that Opex.
Naturally hedge youre, not really seeing an impact of that.
I'll, let Jeremy answer your real question I will just tell you straight up the.
The real reason that revenue is coming down as the appliance business.
Beginning at the end of story, but Jeremy you guys want to take the FX piece sure, Yes, I agree with David It's the appliance business, what we experienced in <unk>.
Q1, and really what we think now.
Based on that experience with the rest of the year will look like and then on the FX front, one as compared to where we started the year we've seen a benefit.
With the dollar weakening a bit I think we probably peg you started the year parity with the euro we're sitting around 700 to eight today I believe our yesterday.
So that's a bit of a benefit in general we try to hedge 60% to 70% or so in our European businesses.
Against FX.
We fight both translation and transaction, obviously youre not really hedging translations. So you still have some level of exposure as you go through the year, but the trend right now is a little bit positive and we've reflected that in our updated forecast.
Alright, great. Thank you very much.
Thanks Ian.
Okay. Our next question.
One moment.
It comes from Chris Carey with Wells Fargo. Your line is open.
Hey, good morning, everyone.
Hey, Chris.
Hi, So just a clarification and then a question another question Jeremy.
I just wanted to clarify a prior question around EBITDA phasing, yes, Im looking at the Q2 consensus EBITDA of $80 million after roughly $40 million this quarter and commentary on headwinds persisting into Q2 margins, Don and flat until March.
Can we be thinking about an EBITDA number roughly at that level and I apologize. If you had said this and I missed it but I just I just went up.
Get that straight.
Just make sure we're thinking about that correctly.
Yes, I didn't I didn't mentioned is with specific numbers for the quarter and we don't give quarterly.
Guidance, but understand the question certainly, yes, I mean consensus of setting setting for Q2 above our last year performance and clearly I said I expect we're going to be down year over year.
Sequentially I.
I think we can talk through that business by business as we connect with vessel today, but it's the reality is I think.
That we're going to see a decline in HBC and most likely given our comments around the <unk> timing of loading inventory.
At retail or going to see a decline there as well so.
For the first and second quarter impacted by a lot of factors.
That are frustrating, but the real we also know when they when we get relief from them and so agree with David's comments that come March in and certainly the third and fourth quarter.
We expect much better margins, but as I said earlier just.
Take solace in the fact that we are not expecting a positive.
Sequential change in consumer demand in our forecast.
We're expecting this to be a slug it out year across the board with the exception of I think a better weather season for home and garden.
Okay great.
Got it Thats very helpful.
David.
Just assets and maybe ill just packet from a little bit different lines, but.
The macro backdrop has obviously evolved a lot since the <unk> deal was initially announced that clearly at the time they were.
Maybe nebulous and or direct plans for debt pay down and stock buybacks and potential M&A and so obviously you still have.
Some time to make these decisions should the deal come through as you expect but.
Does the backdrop change your thought process around okay, well, we need to pay down more debt than maybe we wanted we need to put more money into buybacks as opposed to doing M&A like why would we do M&A and evolving backdrop, just conceptually how does the macro impact how youre thinking about deploying capital.
Sure.
Do you expect that deal go through.
And I appreciate the question.
<unk>.
The whole reason that we agreed to sell HHR to Asa.
We really believed we had been the best steward of the asset we could have been and taken it as far as we felt we could take it given that.
We are a diversified business, we have four different businesses now we had six a few years back and we have a levered balance sheet and so.
The simple fact of matter is Asa is in.
In a great position to bring innovation R&D launched new products give consumers choice and quite frankly bring more competition to the market. So the original deal is constructed.
I think it's fantastic for the American consumer clearly I wish the Doj, we'd see it that way.
But.
Any and all questions that you could possibly raise about any sort of competitive erosion is absolutely neutered bye.
<unk> sale of their assets to fortune and so that is why I am highly confident in winning at trial and I look forward to that in terms of your commentary around the environment changing and how do you allocate capital from here.
Look I remain one of the largest individual shareholders of the company.
Absolutely dislike.
Dislikes are mild or our current leverage and so.
As I said earlier.
The money gets wired on a Monday Tuesday, we're going to pay off all of our bank debt that's for sure.
Again this deal I can't believe it's taken almost two years now, but the reason we did this deal was we wanted to have basically a debt free balance sheet and we wanted to have tons of liquidity in case the market fell apart multiples contracted we would then be in the cat urgency to do it.
Creative tuck in M&A.
And.
Unfortunately, we have run into this now.
With the Doj.
And.
Conditions have deteriorated, but we still don't have the cash and so yes, I think paying down debt is the number one priority given current leverage I think buying back shares is a lot less risky than buying some other business.
And then we still need to solve for the appliance unit and so you may see us buy in I don't know a half a billion of stock 1 billion of stock, we'll see where it is when we get there, but we'll probably keep some extra cash sloshing around also because we're committed to creating a global pet care.
And home and garden business, and that's going to require us to.
Merge spin solve for the separation of our of our Hp's of our HBC asset. So that's the current thinking.
Long winded, but hopefully it.
Helps you out.
Okay.
Thank you both.
Thank you.
Okay.
Thank you. Our next question comes from William Reuter with Bank of America. Your line is open.
Hi, Paul.
Following up on the last question previously you had a pro forma gross leverage target that was explicitly to two five times. After the deal is that no longer kind of in place or are we now kind of going to rethink everything.
Yes, so what I would say there is that is a point in time, when we were trying to give the market an indication of the volume of debt reduction that we would expect so directionally I think thats still in the right place.
So mechanically with our EBITDA declining this year as compared to where it was when we made that kind of pinpoint in time announcement that would imply something different so I would not expect one of the things that we talked about originally bill is is that we have the debt.
The bank debt that David talked about and we have two callable bonds and our longer dated paper totals about $1 1 billion in total.
That level of debt is probably a reasonable place for us to end.
The mechanism in which notes and pieces of notes et cetera that happened that's still TBD once we get closer to closing, we'll figure that out along with our advisors.
Do you want to add.
One five is still a good ratio.
The the.
The amount of debt pay down might be greater than initially anticipated.
Great and then just one follow up.
Jeremy earlier, you mentioned that your freight costs have gone up by $80 million versus pre pandemic levels and you guys also talked about how those freight costs are now kind of on a cash basis that pre pandemic levels would we expect to see $80 million of freight come out of your P&L costs over the next year or 18.
[noise] months, whatever it is until those flow through.
No. So when we talk about cap variances as explicitly as we have that really that includes free.
<unk> freight inflation, so it's not incremental to that $55 million that we talked about in the first half of this year and my comments earlier to say that even current market rates.
Our heavier higher than pre pandemic levels.
I don't see that taking a further step down unless the global economy also takes a further step down and then that kind of adds to the rest of add more challenges to the plate. So I would not expect an incremental $80 million to $100 million of benefit next year as compared to the $55 million of cap area and so I was talking about earlier.
Great. Okay. That's all from me. Thank you. Thanks.
Thanks Bill.
Thank you.
Our next question comes from Carla Casella with Jpmorgan. Your line is open hi.
Most of my questions have been answered, but one clarification, you talked a lot about inventory at retail and retailer destocking.
Did you say I may have missed it.
Macquarie are heavier at retail and inventory and or <unk>.
Even on your own books, it might take longer to work through.
Yes, we're trying to point you to durable goods, so where we've got post Robbins and Coffeemakers, it's still heavy and we got undercut on the holiday season by some competitors doing things even beyond our.
While this destinations.
Thanks, those type of things.
But again, the bulk of our business, where we play.
We're 80% consumable and pet home and garden had a very rough year last year with weather.
Again.
Pretty optimistic our pet home and garden going quarter, yes.
Yes, I would say in home and garden.
As retailers have been slower to order, we have seen their inventory coming down.
It's still a little bit higher than it was a year ago, but I don't think.
Materially enough to impact the season as it comes.
Okay, Scott had talked about a stronger December and I'm wondering.
Yes.
Differences in the business or.
Do you think they are discounting is that kind of where you see more of that.
I'm not going to hit its business mix. They sell a lot of seed growing media, we're not in that business, we need there we need the weeds to grow and then we can kill them and so we're.
We're typically March to June is kind of our hotspot.
That's super helpful. Okay, and then one on this recent acquisition, where post bought pet food brands from Smucker, Chris Im wondering how youre thinking about M&A did you look at that deal are there certain categories. I think you would stay away from getting this big chunk of cash and soon hopefully.
Looking at any transactions, except for closing HHR delevering the balance sheet.
Trying to deliver on our promises for fiscal 'twenty three.
The reality of our situation.
Okay, great. Thanks.
Thanks Carla.
Thank you and I'm showing no other questions at this time I would like to turn the call back to Seth with Carter for closing remarks.
Thank you with that we've reached the top of the hour. So we will conclude our conference call. Thank you, David and Jeremy and on behalf of spectrum brands. Thank you all for your participation today. Thanks, everybody. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly two reasons lower Johan during Q&A, you can dial star one one.
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Okay.
Yeah.
Okay.
Okay.