Q2 2023 Spectrum Brands Holdings Inc Earnings Call
Speaker 1: conditions, as our total sales declined 9.7%, while organic sales declined 10.1%. Jeremy will provide more details by business unit in his comments.
Speaker 1: While this volume decrease was the main contributor of the EBITDA decline in the quarter, EBITDA was also pressured by unfavorable FX year over year, as well as the impact of selling down our higher cost inventory accumulated during the prior year periods. As a reminder, we started this fiscal year with approximately...
Speaker 1: currently the expected profitability inflection point in our recent monthly results.
Speaker 1: If I can move your attention now to slide 7 in our high level fiscal 23 earnings framework.
Speaker 1: We remain very pleased with the performance of our global PEC care business and we continue to see improvements in our home and personal care business despite the anticipated headwinds in its end markets.
Speaker 1: for our home and garden business. But with the change in retailer inventory strategy that we experienced in the just completed quarter, we expect sales in that business to be well below the POS levels in the fiscal year, and therefore below our previous expectations.
Speaker 1: With the additional sales pressure, we now expect the H&G business will not reach its full earnings potential during this fiscal year and will fall short of our previous EBITDA expectation for that business.
Speaker 1: Based on this additional revenue pressure, we need to update our earnings framework.
Speaker 1: We now expect the top line for the year to decline by mid-single digits to last year.
Speaker 1: As a consequence of this sales decline, we expect our adjusted EBITDA to be down in the low mid-single digits. Before I turn the call over to Jeremy, I would like to thank our teams around the world who have worked tirelessly throughout a period of uncertainty related to the almost two-year pending HHI transaction. And while facing...
Speaker 1: All the while the current market headwinds in making some very difficult short-term decisions to prepare our business for long-term success.
Speaker 1: Now you will hear more from Jeremy on the financials and our additional business unit results, and then we'll join you in the Q&A. I'll turn the call over to you Jeremy.
Speaker 2: Thanks, David. Let's turn to slide 9 for review of Q2 results from continuing operations. Net sales decreased 9.7%.
Speaker 2: Excluding the impact of $19.4 million of unfavorable foreign exchange and acquisition sales of $22.1 million, organic net sales decreased 10.1% from reduced customer replenishment orders as they maintain focus on inventory reduction, particularly in home and garden and kitchen appliances product categories.
Speaker 2: and from lower consumer demand for hard goods and consumer durables categories compared to last year.
Speaker 2: Gross profit decreased $41.1 million and gross margin of 29.4% declined 220 basis points from a year ago. From the reduction in volume and from sales of higher cost inventory accumulated during the prior year, partially offset by positive pricing.
Speaker 2: Operating expenses of $291.5 million increased 10.5% at 40% of net sales.
Speaker 2: With the dollar increase driven by the recognition of intangible asset impairments on our Rejuvenate and Power XL brands of $67 million dollars combined.
Speaker 2: offset by the positive impact of fixed cost reduction efforts initiated in the prior year and that continued in the second quarter along with overall spend management.
Speaker 2: The operating loss of $77 million was driven by the impact of the sale decline and the intangible asset and pyramid charge I mentioned.
Speaker 2: The gap net loss and decrease in diluted earnings per share were primarily driven by the increase in operating loss and higher interest expense.
Speaker 2: Adjusted EBITDA was $51 million, declining due to the decrease in volume and unfavorable foreign exchange impact offset by favorable price and fixed cost reductions.
Speaker 2: Adjusted diluted EPS declined to a loss of 14 cents per share, driven by lower adjusted EBITDA and higher interest expense. Turning to slide 10, Q2 interest expense from continuing operations.
Speaker 2: of $31.6 million increased $6.9 million due to a higher interest rate on our variable rate debt.
Speaker 2: Cash taxes during the quarter of $5.7 million were $6.7 million lower than last year. Appreciation and amortization from continuing operations.
Speaker 2: $22.4 million was 3.3 million lower than the prior year.
Speaker 2: Separately, share and incentive-based compensation decreased $2.1 million.
Speaker 2: Capital expenditures were $15.9 million in Q2 versus $10.2 million last year.
Speaker 2: Cash payments toward strategic transactions, restructuring related projects, and other unusual nonrecurring adjustments were $22.5 million versus $28.7 million last year.
Speaker 2: Moving to the balance sheet, the company had a quarter-end cash balance of $328 million and $362 million available on its $1.1 billion cash flow revolver.
Speaker 2: Total debt outstanding was approximately $3.2 billion.
Speaker 2: consisting of 2 billion of senior unsecured notes, $1.1 billion of term loans and revolver draws, and $91 million of finance leases and other obligations. Thissing
Speaker 2: Additionally, pro forma net leverage was 6.3 times compared to 6.2 times at the end of the previous quarter, as the trailing 12-month EBITDA declined sequentially.
Speaker 2: Now let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results.
Speaker 2: I'll start with global pet care, which is slide 11. Food net sales increased to half a percent.
Speaker 2: Excluding unfavorable foreign currency impact of 7.6 million, organic sales increased 3.1%.
Speaker 2: Net sales improved in the second quarter as compared to the first quarter, which was pressured by customers' focus on inventory management, leading to lower replenishment orders.
Speaker 2: Organic sales in both the US and internationally increased over last year as demand for companion animal categories remained strong, offsetting softness in the aquatics category occurring across all markets.
Speaker 2: Sales were also helped by new price increases in EMEA and by the impact of pricing actions taken globally throughout last year.
Speaker 2: Our EMA sales were adversely impacted by unfavorable foreign exchange rates as the dollar strengthened against the British pound and the euro compared to last year.
Speaker 2: Adjusted for FX, sales increased in EMBA due to growth in the companion animal category, mainly driven by our dog and cat food sales, which offset the crimes in aquatics as we continue to compare to strong prior year aquatic environment and equipment sales.
Speaker 2: Most of the planned price increases in EMEA announced during the first quarter have been successfully implemented, with a few starting in the third quarter. Price increases are offsetting cost pressure from unfavorable FX and energy inflation that we continue to experience in our international business, which are in line with our expectations.
Speaker 2: Fails in the Americas also benefited from strong growth in our companion animal categories offset by declines in aquatics due to challenging prior year comps.
Speaker 2: However, while our overall aquatic sales declined, sales for aquatic nutrition products continued to show growth.
Speaker 2: On the cost side, we experienced inflation in line with our expectations and are encouraged by the fact that costs have either stabilized or in some cases are starting to retreat.
Speaker 2: That said, we will continue to closely monitor input costs and strategically price as necessary.
Speaker 2: Fueled by innovation, our global dog-choose business recently achieved an exciting milestone by surpassing a billion dollars in retail sales.
Speaker 2: Exciting innovation, unique form factors and flavors, seasonal offerings, and global expansion have fueled that growth.
Speaker 2: In Q2, we launched innovation in the highly digestible rawhide segment through the Good and Fit brand in the US.
Speaker 2: which has already gained distribution in mass and drug channels. In Europe , earlier in the year, we launched the Tough and Tasty line under the Good Boy brand.
Speaker 2: And I've seen success both the UK and in Germany, which is a new market for the brand.
Speaker 2: Additionally, in Europe we launched new flavors and sizes in the Eins brand and have expanded the Yukonuba brand into the wet cat food segment.
Speaker 2: Both have been well received and are one of the catalysts behind the strong growth our dog and cat food business is experiencing.
Speaker 2: Adjusted EBITDA for GPC increased to $46.3 million.
Speaker 2: The increase of $5.7 million was primarily driven by favorable pricing, including the incremental pricing actions in the EMEA region, and our continued focus on cost reduction measures, including the fixed cost restructuring we initiated last year.
Speaker 2: and further cost action during the first half of this year. This was partially offset by lower volume, the unfavorable impact of FX, and the impact of capitalized variances as we continue to sell our high cost inventory from last year.
Speaker 2: On a positive note, the unfavorable impact of capitalized variances from the prior year high cost inventory is now behind us and we are already seeing our margin profile improve.
Speaker 2: We expect to see the positive sales trend continue in the second half of the year. We remain cautious about performance of certain categories within the pet specialty channels, such as aquatic environments and hard goods within companion animals.
Speaker 2: as the rates of new entrants settle to pre-pandemic levels. But we expect the positive trends in companion animal consumable categories to more than offset these pressures.
Speaker 2: Overall, the category fundamentals remain strong, especially within consumables. This is encouraging as our business is becoming more aligned to consumable products for your pet, which represents over 80% of our total revenues. The GPC team remains focused on the execution of our long-term strategy, which is centered around inspiring more trust through the delivery of unique, more efficient, and more efficient products.
Speaker 2: and innovative products in order to drive demand for our portfolio of leading brands.
Speaker 2: Our pet business is a historically recession resistant business with tremendous upside potential, which is why we remain bullish about the continued growth of this business.
Speaker 2: Moving now to home and garden, slide 12, net sales decreased 22% in the second quarter, driven by a higher than expected reduction in retail inventory compared to a strong prior year build ahead of the season. Fresh weather conditions late in the quarter also negatively impacted the pest controls category POS.
Speaker 2: and resulted in lower replenishment orders.
Speaker 2: This was partially offset by the impact of price increases.
Speaker 2: Sales of cleaning and restoration products also decreased due to POS decline in our relevant categories.
Speaker 2: as well as comparison to last year inventory loads during the quarter. Slower start to the spring cleaning season also contributed to the POS decline in the quarter.
Speaker 2: The weather has been a mixed story so far this year with some very positive POS weeks mixed in with negative POS weeks due to cooler weather.
Speaker 2: As I mentioned earlier, there is a shift in the retailer strategy, and our key retailers are maintaining significantly lower inventory levels compared to last year in the second quarter.
Speaker 2: We now expect this trend to continue, leading to further retail inventory decline in the third quarter to pre-COVID levels.
Speaker 2: This reduction will directly impact our sales expectations in the second half. That said, we still expect high single digit POS growth in the second half of the year and believe that consumer demand will remain strong with the weather outlook pointing to a more normal season with higher temperatures and humidity.
Speaker 2: As a reminder, on average, around 70% of POS is achieved in the second half of our fiscal year.
Speaker 2: We continue to believe in our strong innovation that is reflected in new products that are now being rolled out to the marketplace.
Speaker 2: On our Spectracide brand, we now have available the new OneShot platform.
Speaker 2: a program designed to bring to market new ingredient technologies and superior delivery systems across several categories.
Speaker 2: First product under this platform is One Shot Premium Weed and Grass Killer.
Speaker 2: A product designed for a highly demanding consumer that is willing to pay a premium for superior results.
Speaker 2: Traditionally, Spectaside is focused on consumers looking for strong results at a great value. Our one-shop platform allows consumers to find also superior performance options with the brand they trust.
Speaker 2: In repellents, we now offer new zone mosquito repellent devices, Cutter Eclipse and Repel Realm.
Speaker 2: Although our brands have a strong presence in area repellents, the device-driven outdoor diffusers is a new segment for us.
Speaker 2: We are excited to offer these new products as it allows us to enter a segment where we feel confident about bringing disruptive technologies and superior devices to protect and delight our consumers and their families. We are excited about this launch and the future for our brands in this area.
Speaker 2: We are carefully monitoring POS and coordinating with our retail partners to ensure we can appropriately supply the products to meet consumer demand. As I referenced earlier, we expect further retail inventory reduction action in the second half. We have made strong progress driving agility and speed into the organization.
Speaker 2: as it will be required to effectively ramp up production and meet the expected increase in retailer demand as the spring and summer season continues. Adjusted EBITDA for our H&G business was $15.1 million.
Speaker 2: Event-to-Io decrease was primarily driven by the sales decline and impact of selling through prior year high-cost inventory.
Speaker 2: This was partially offset by the benefits of fixed cost restructuring and operational cost reductions initiated during the second half of last year.
Speaker 2: We experienced higher product costs from raw materials, labor, and freight in line with our expectations.
Speaker 2: As we look forward to the balance of Fiscal 23, we still expect sales growth in the second half of the year, but not enough to make up for the first half performance. As a result, we expect sales to be down for the full year.
Speaker 2: Although we believe that the fundamentals of the consumer market remain strong, this will likely be a difficult year for the home and garden business because of the challenges posed by the retail channel inventory strategy.
Speaker 2: And finally, home and personal care, which is slide 13. Reported net sales decreased 11.7%.
Speaker 2: Excluding the unfavorable foreign exchange impact of $11.8 million and the impact of the TriStar acquisition, organic net sales decreased 14.9%.
Speaker 2: The organic net sales decrease was driven by category decline from lower consumer demand, particularly in kitchen appliances.
Speaker 2: and continued retail inventory reductions. Sales were also lower in personal care appliances and garment categories.
Speaker 2: North American retail inventory is particularly high on our Power XL air fryers as demand remains well below pandemic highs.
Speaker 2: We expect continued pressure for the remainder of the year for this product line as retailers work down inventory through suppressed replenishment orders.
Speaker 2: On the positive side, our hair care category grew in the second quarter. EMEA region sales also declined, primarily driven by FX and reduced consumer demand.
Speaker 2: Edib FX, personal care category, registered growth in the EMEA region.
Speaker 2: A small kitchen appliances continue to see the most pressure from consumer demand.
Speaker 2: Despite the difficult market conditions in the small appliances space, we are having success with our new launch of Russell Hobbs Air Fryers, which is quickly becoming an important category in EMEA, growing significantly from its launch last year.
Speaker 2: We have also successfully launched PowerXL in EMEA, which is rapidly growing versus last year.
Speaker 2: JESDA-DBTAB decreased to a loss of $1.9 million. Lower adjusted EBITDA margin was driven by lower volumes.
Speaker 2: JASA-DBDA decreased to a loss of $1.9 million. Lower JASA-DBDA margin was driven by lower volumes, the impact of unfavorable foreign exchange rates, and the impact of the
Speaker 2: and higher cost of sales as we continue to sell our high cost inventory from last year. Some of this EBITDA pressure was offset by our continued focus on cost reduction measures.
Speaker 2: including the fixed cost restructuring we undertook during the second half of last year, and additional restructuring actions initiated during the second quarter this year.
Speaker 2: Looking forward to the second half of the fiscal year, we continue to expect softer consumer demand, particularly in the kitchen appliances category, and expect US retailers to continue their focus on inventory reduction.
Speaker 2: As such, we have also maintained our internal focus on inventory reduction and have further slowed down and in some cases stopped incoming orders.
Speaker 2: This focus on inventory reduction has paid off and has already resulted in a substantial decrease in the inventory levels of the HPC business.
Speaker 2: We believe HPC inventory levels are now appropriate to support the demand in the marketplace and we do not foresee further significant inventory reduction here.
Speaker 2: Commercially, our renewed focus remains on driving fewer, bigger, better consumer-relevant innovations that enhance our current market position.
Speaker 2: Simplify the operating model of the business.
Speaker 2: Turn now to slide 14 and our expectations for 2023.
Speaker 2: Given the change in expectations for our H&G business, we now expect fiscal 23 net sales to decline by mid-single digits to last year.
Speaker 2: Foreign exchange expected to have a negative impact based upon current rates. Expect adjusted EBITDAX to be down by low to mid single digits primarily due to additional sales pressure with inflation headwinds.
Speaker 2: offset by the annualization of prior year pricing actions and additional price increases already implemented during the current year.
Speaker 2: as well as additional productivity gains and the benefits of our cost production actions. Now on to slide 15.
Speaker 2: Depreciation and amortization is expected to be...
Speaker 2: between 105 and $115 billion, including stock-based compensation of approximately $7 to $12 million.
Speaker 2: Full year interest expense is expected to be between $120 and $125 million, including approximately $5 million of non-cash items. Cash payments toward restructuring, optimization, and strategic transaction costs are expected to be $5 million.
Speaker 2: are expected to be between $55 and $70 million. Capital expenditures are expected to be between $55 and $65 million. Cash taxes, excluding any gain on the sale of the HHI business, are expected to be between $25 and $35 million. For adjusted EPS, we use a tax rate of 25%, including state taxes.
Speaker 1: Let me just take a couple of minutes here to recap the key takeaways on slide 17.
Speaker 1: Look, first, the resolution of the DOJ challenge of Asa Abloy's acquisition of our HHI unit is our most significant achievement. We are well on our way now to completing this transaction on or before June 30.
Speaker 1: With the successful completion of this transaction, we will be able to meaningfully strengthen the balance sheet and we will immediately start the process of deleveraging. This transaction will also bring us much closer to our long-term goal of becoming a faster growing, higher margin, pure play pet and home and garden company and it will allow the team to now devote resources and prioritize long-term growth.
Speaker 1: more than we originally planned. But we remain confident in the long-term strategy and our ability to deliver value to our consumers and customers worldwide. Last, we have successfully pivoted the teams to focus on profitability, working capital discipline, and cost management, as evident from our inventory reduction and cash flow generation thus far in the fiscal year.
Speaker 1: as well as the positive results of our fixed cost reduction actions. I want to close today by reiterating that I remain very optimistic about the future of our company, and I believe we are well positioned to execute on our operational goals, generate cash flow in fiscal point 3.
Speaker 1: I'm very excited about the strategic pivot that we're on now and we're going through as we sell HHI to ASA. And I want everyone to know the future of Spectrum Branch is brighter than ever. I'm going to now turn the call back to Fessel and we can begin Q&A.
Speaker 3: Thank you, David. Operator, we can go to the question 2 now.
Speaker 4: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster.
Speaker 4: Our first question comes from the line of Peter Grom with UBS. Your line is open. Please go ahead.
Speaker 5: Thanks, operator. Good morning, everyone.
Speaker 5: It's been a while since you really discussed the use of proceeds in detail, and I appreciate the commentary around targeting that leverage in the two to three-and-a-half times range and that you plan to return cash to shareholders via buybacks, but have you given any consideration to the size of the buyback and what the program could look like at this point?
Speaker 5: It's been a while since you really discussed the use of proceeds in detail, and I appreciate the commentary around targeting that leverage in the two to two and a half times range and that you plan to return cash to shareholders via buybacks, but have you given any consideration to the size of the buyback and what the program could look like at this point? Thanks for the question. Yes, your question. Look...
Speaker 1: I guess the lower the share price, the bigger the buyback is by answer. Look, at the end of the day, right, we still haven't closed. We literally just got through DOJ last week.
Speaker 1: This week it's been the board and today's earnings calls. We're very confident in closing this deal on or before June 30. The last nine months has really been us trying to get the balance sheet healthy. We're very confident in closing this deal on or before June 30. We're very confident in closing this deal on or before June 30.
Speaker 1: And you know, working off a bunch of inventory here has really hurt the P and L. But I believe, look, we're gonna pivot this balance sheet pretty quickly here, and now we're gonna really focus on pivoting the P and L and getting the profits going in the right direction. But look, I would like to meaningfully shrink our flow. And you know, depending on where the share price is when we close the HHI deal, you know, we'll...
Speaker 5: outstanding in Mexico. Is that something we need to be worried about? Is it progressing in line with expectations? And I guess, assuming that goes through, how quickly can you close after you get that approval?
Speaker 1: Yeah, I think we just got to have to stick to the script here. I mean, yeah, Mexico needs to approve the deal. We think they will approve the deal. We don't expect any issues with it. We intend to close the deal on or before June 30.
Speaker 5: Great, thanks so much. I'll pass it on. Thank you, sir.
Speaker 5: Great. Thanks so much. I'll pass it on. Thank you, sir. Thank you.
Speaker 4: And one moment for our next question. Our next question comes from the line of Bob Levick with CGS Securities. Your line is open. Please go ahead....
Speaker 2: Good morning and congratulations on the DOJ settlement. Hey Bob. Thanks Bob. Long time coming. Yeah, it was a nice theater, but it's a good outcome obviously. I didn't enjoy the theater, but thank you. Fair enough. Fair enough.
Speaker 2: I wanted to just take a half step back and say, you know, we're talking about a lot of macro and, you know, near term inventory and all that kind of stuff right now. Any of the discussion on today's call impacting the, you know, calendar 24 outlook for the businesses, orch Teachers rollout or Texts that come in over the days, are relatively Potato Youth comprised of
Speaker 1: you know, or we just kind of caught up in a lot of noise because we have to be because that's the world we live in. I think I'd like to talk to investors directly, right? I think, look, there's clearly been a lot of orbs in the stock. You know, you buy stuff on the room or you sell on news because, you know, there's over $100 a share in cash coming into the company here in the next month or so.
Speaker 1: Look, at the end of the day, a fundamental investor should zoom out and realize that COVID pandemic, the supply chain elongation, the spike in demand from our retail customers has caused a very large impact on our retail industry.
Speaker 1: object to have to pass through the snake, right? And we ballooned our balance sheet to help our retail customers through, hopefully, in my lifetime, once in a lifetime event. And when you take your balance sheet up 400 or 500 million bucks to
Speaker 1: try to satiate retailers demands and then that supply chain snaps back and then demand drops off the cliff. Liquidating for us a small company almost 350, 400 million bucks inventory, you're not gonna do that in the most gentle way. And so that really
Speaker 1: damages your P&L and it's very difficult. Look, I'm very upset about our home and garden performance in the quarter. But the reality is very difficult to anticipate a retail shift from, if you traditionally build inventory going into a season where you sell everything in 90 to 120 days. So, to get to that point, you have a pipeline of jurisdiction to spend this entire year anxiety.
Speaker 1: To well, hey, we're just not gonna pre build this year. And by the way, we're gonna just take the inventory level down to pre COVID levels. That's a big change in strategy that's very hard to, I just can't dig out of it in the next six months, given the seasonal nature of the business. But I think if people can kind of look at the fundamentals. I think that's a big change in strategy that's very hard to come across.
cleaning up the balance sheet and showing a lot more clarity as we've gotten through the distortion as you call it with the inventory, balance sheet, P&L.
distractions. I think towards the first and second half as we talked about on the call, we have seen a margin inflection point of that entire basically the entire $55 million of cab variance is gone at the end of Q2. There might be a million dollars left in HPC and Q3 but that's it.
That's not only a second half tailwind, that's a 2024 tailwind. And then the other thing I would mention is that, I don't know if we were completely explicit about it, but the reality is, our sales in H&G in fiscal 23 will basically be below POS. It's something we want to push the market to. I've always said, everything I said to somebody is just more easy to go bye, here we go again, what's new in October ?
as a body of work, as a body of consumer demand. And I would not expect that to continue in F24. So I think there's positive news ahead for H and G as we look to 24. Agree with David, unfortunate we are where we are this quarter. It would have been a really nice quarter had it been a more normal season for us. And I think that would have been a really nice quarter had it been a more normal season for us. And I think that would have been a really nice quarter had it been a more normal season for us. But I think there's positive news ahead for H and G as we look to 24.
Okay, great, thanks. And then just, again, taking us back from previous calls, we've talked about, I believe you've said, you believe the pet business is a $200 million EBITDA business, $200 million plus. And then there's $120 million plus.
Are those still the right kind of starting points when things normalize? I won't pinpoint you to a time period for it, but just in general, has anything changed materially in those businesses? Are those the right sizes for those businesses as we normalize?
In my mind those are the right numbers still Bob. Okay, fair enough. I'll get back in queue. Thanks. Thank you and one moment.
Our next question comes from the line of Olivia Tong with Raymond James. Your line is open. Please go ahead.
Great, thanks, good morning. Good morning. I wanted to ask first on lawn and garden because I get that the weather was unfavorable. We've obviously seen that across other companies already. But your sales seem to have been hit more this quarter than they were. And I always thought relative to some of your peers that your portfolio was skewed a little bit later in the season given the insect control focus. So
What's your view on how much of this is weather versus a new normal and inventory or other factors that might be playing into that buying closer to demand and normalization of demand? Thank you.
I don't attribute a ton of it to weather. I think we had some spotty weather that could have helped us a bit later in March. The second half of March wasn't great. The POS, the first half was pretty good. It really is about a shift in retail strategy where we were really expecting to see retail inventories normalized to 2021 levels.
And the reality is, to David's point earlier, they're going back to pre-pandemic levels, think like 2019 levels. Inflation adjusted, that's even lower volumes, because we do have a lot of price there. And that, as I said in reaction to Bob's question, that's led to really low retail orders on us, despite POS that's fairly normal, cuz they're taking their inventory down. So.
They have been largely successful with that in the first half of the fiscal year. They meeting our big three retailers. Though there is still some pockets we see where it is higher. I agree with your comment that as compared to some of our public peers in this space, our season is a bit later. But the strategy specific to our categories is one that we just did not expect as we entered the year. Which is why we have one of our
And then, I wanted to ask you about HPC and your view in terms of the timing of exploring strategic alternatives. You mentioned inventory is now right-sized in your prepared remarks, but also that small appliances continue to be under pressure, especially in kitchens. So, it looks like margins will be down again this year. So, as you think about closing up, and I don't need to start, you know, to immediately go into...
post-pandemic kind of fallout in that industry.
It's definitely going to take us a couple of quarters to nurse that back to a proper level of profitability and health. I think you shouldn't anticipate us.
you know, spinning that off or merging that the day after we close HHR. I think that's going to take, you know, multiple quarters, but you know, we are very interested as a board of directors into becoming a pure play petal in the garden company and we'll be very actively pursuing that. You know, this summer going into the fall, but...
You know, we want to be responsible, we want to nurture that business, we want to We want to build that EVA to back up and then we'll see what's available Thank you
Thank you. And one moment, please. And our next question comes from the line of Chris Carey with Wells Fargo Securities. Your line is open. Please go ahead. Hey, everyone. Hi, everyone.
Hey, Chris. Morning. Good morning. So, the debt pay down, right, term loan and revolver, I don't think that puts you at your leverage target. So, I guess the first question is…
Do you anticipate getting to your longer-term leverage targets immediately or would that happen over time? Do you still expect $3.5 billion net cash from the deal?
Well let me back up. Your question is a little off. So if I get $4.3 billion of cash in the door, I only have $3 billion of debt, and my leverage ratio is a net debt.
leverage ratio. So I'm net debt free. But my net leverage when I close the deal is negative. So yeah, no, that's fine. So the goal is still term loan revolver.
And then the rest of the debt you'll assess and the residual cash will remain on the balance sheet for buybacks or other strategic initiatives. That would be the.
that you'll assess and the residual cash will remain on the balance sheet for buybacks or other strategic initiatives. That would be the key idea here.
Yeah, I mean look, you know, when we signed this deal, interest rates were zero, right? In terms of deposits. And we have some bonds out there that, you know, are...
So we're gonna look at the whole cap structure, but it's a pretty good situation to be in. And we wanna stay liquid, we wanna have plenty of firepower to buy in shares. And we wanna maintain a very low leverage profile as we restore earnings power. Fresh off same lines, keep cutting and I'll try to stay the same
from this point on. So yeah, we're pretty excited to get this closed and then to be able to focus. Not trying to make excuses, but having a big asset dangling out there for sale for two years, has consumed a lot of calories.
Yeah, that makes sense. Yeah, that's true, Chris. If you look at the bonds and the capital structure too, our highest cost bond, I think, is our 2025 and that has a step down to callable par in July . So that's obviously something we'll take a look at.
And then as the year progresses, we kind of have a 12 month window on reinvestment with proceeds. We'll look at the whole portfolio and figure out the right strategy. To David's point, a lot more financial flexibility and timing flexibility given where interest rates on deposits are now, which I think is a good thing for us and for our shareholders that we have time and we could be thoughtful on this.
And then just summon that cash, proceed.
Pardon? Oh, yeah. Right. 3-6, net proceeds is the ballpark.
Okay, all right, thanks. And then this conversation on earnings power I think is well taken.
Clearly, you have cost headwinds in the front half. You're cycling high-cost inventory, and obviously, the retailer dynamic is something we're seeing elsewhere. I guess I'm also looking at fiscal 24 EBITDA consensus, which is going to be 30 percent growth versus where you're effectively guiding today, which certainly seems like a high bar.
The recovery here, are you expecting a quick snap back in your margin structure and sales, or is it more appropriate and maybe prudent to think about a progressive build here back to the earnings power that you had thought about for this portfolio?
Yeah, I mean, I think, you know, to my comments on the cap variances that we experienced, right? So. You know that 55 million, I think, rolled off 25 and 29 Q1 and Q2 respectively. That debit excess debit, the cost of goods sold effectively goes to zero and Q3. So.
I think you're going to see a really nice sequential improvement, particularly in global pet care, which doesn't really face the retail inventory strategy change that Home and Garden is facing. So I think the second half looks really good there and it moves pretty quickly. HPC is a bit of a different story to David's...
comments on what's happening in that category, so a little more cautious, but we still have that sequential improvement in margins that comes from those cat variances being gone. And then you have home and garden, and we've obviously talked that to death here, but I think that gets better as we go into 24. I like your word for it. All right.
I like your word progressive. We need to get our house in order. We need to really get refocused and start to execute consistently. I like the word progressive, but we've got a very good outlook. Okay. Forgive me. I know this is dominating here, but I get this question a lot. I figure I'd just put it to you, then I'll get back in the queue.
The cash flow conversion to EBITDA is phenomenal year to date. I realize there's the working capital dynamic with working debt inventory. Do you have a sense of what your pre-cash conversion should be over time in a more normal environment? I don't know, just EBITDA. EBITDA is covered in a poll onbull install Like us?
percentage of EBITDA is a great way to think about that. But any comment there on cash flow being seemingly an even bigger focus for you now, but it's typical this year. So what's the medium term dynamic looking like from a cash conversion standpoint? I usually model it at 50% of EBITDA, Chris, in our longer term models. I think that's a safe assumption to use. Really confident in our revamped supply chain team, the experience that we've had the last couple of months.
three quarters, taking inventory down 340 million. I think we're gonna stay really tight on inventory. And in a business like ours with the large customers that we have, inventory is the real only wild card in free cash conversion from EBITDA. So I think 50% is a safe way to assume it. And I think 50% is called a futures trade plan. And it still assumption holds that thecients of bonding
Okay, all right, thanks so much. Thank you and one moment for our next question.
Our next question comes from the line of Anne Zafino with Oppenheimer & Co. Your line is open. Please go ahead.
I agree. Thank you very much. How are you guys?
Good. Good, good. So when I think about your proceeds, how much do you think you need to pursue, let's just say, tuck in M&A? How much do you think you need to invest in the business? You know, there's questions on the buybacks and stuff like that, but I'm kind of more looking at it from an M&A perspective and then also...
has not been any fun. And so getting this balance sheet right, shrinking this flow, and then getting some real consistent profit. old
I think it's job one, two, and three around here. I think that's going to benefit shareholders tremendously. That's where we're going. That's the best interest to everybody on this phone. I think next quarter's call.
you guys are gonna get a lot more color around balance sheet, capital allocation, and we'll be able to talk at more liberty, right? It's just we've gotta close this deal. logical p
look at the world around us and I just I don't want to box myself into anything on this call. You know like I said if the share price is really low we'll buy a lot of stock if it's high we will buy less.
But we want to clean this balance sheet up. And I like the other, Chris, you were asking about free cash flow, the earlier question. I mean, it's a different world when you're in a net debt zero position. And I just think that's a real game changer and we'll be able to talk a lot more about it. And I think people will be able to model things very.
reiterated that you've set the same net proceeds. How are we thinking about the NOL exiting or after the close of the sale? Is it going to be exhausted? Is there going to be anything left? Then maybe just an update on the fees that you've been facing now versus what you've been expecting.
Jeremy will take that. Yeah, it will essentially use the entire US NOL to protect the aid. Yep. We will become a constant US taxpayer after this deal. Okay, good, good, good. And then the proceeds, I guess, are the same regardless of like all the inventory adjustments and inventory changes, right? You're asking about the net proceeds. We still think the net proceeds after taxes and...
Your line is open. Please go ahead.
Hey good morning thanks for taking our questions. Don't mean to beat a dead horse but in terms of a potential board authorization of a buyback is it as simple as that that just can't be done until the proceeds come through the door.
We already have a billion dollar buyback and I've got 750 million bucks available to me right now this morning. I've just been livid with a very, very levered balance sheet and I personally have a lot of equity at risk. And I want to get this balance sheet delivered and see where the share price is and we'll go from there. Got it. And then secondly, you've had a very consistent...
change over time and I think that you know today's world it's very rare to find somebody that looks at stocks for more than three minutes let alone three weeks and I think that when you have a deal that gets as much press as this 4.3 billion sale to HHI you attract a lot of
quants and orbs and we love quants and orbs but you know when they see a share price pop they tend to sell into it there's been a lot of volume on the tape and we're getting a lot of rotation and you know, that's just technical stuff, but you know, it's I can't do anything about it nor can I worry about it. I I can just focus on the fact that
sitting here before the call talking to my R team. I think we're gonna have a very different shareholder base when you look at the, people don't like leveraged credits. You get leverage down to two times and stay there consistently, you're gonna attract a different shareholder base. You start growing your EPS consistently.
you're going to attract a different shareholder base. So that takes time. That's not a fix that in three days or a week. That's kind of a three, six, nine, 12-month journey, and I think that's the journey we're going to be on.
to different shareholder base. So that's, that's, you know, that takes time. That's, that's not a, you know, fix that in three days or a week. You know, that's kind of a three, six, nine, 12 month journey. And I think that's the journey we're going to be on. Great. Thank you. Best of luck, guys.
Thank you. Thank you and one moment for our next question. And our next question comes from the line of Steven Powers with Deutsche Bank. Your line is open please go ahead. Yeah hey thanks good morning. Most of my questions have already been addressed so thank you. Just on the two to two and a half.
long-term net leverage ratio objective. I guess, you know, when, what does that mean in terms of timing, from your perspective, when do you wanna kind of be at that run rate, you know, as you contemplate the future? Is that kind of exiting fiscal 24? Is that longer term than that? Just some parameters around what you mean by long-term objective will be helpful.
You know, I, as I said earlier this morning, I don't have a time in mind. You know, we're simply trying to let you know we want to run the business less levered and we put a marker out there.
We don't have any acquisitions teed up. We really want to get the earnings power of the company much healthier.
any acquisitions teed up. We really want to get the earnings power of the company much healthier.
And again, I'm not trying to make an excuse, but having a big asset held for sale is really, really disruptive and distracting. And I think it'd be nice to just settle the business down and invest in some organic growth and really get a decent rhythm and cadence. So we owe that to our investor base. We owe that to ourselves. Ya'll be wrong.
And so, yeah, I mean, I don't know. Jeremy, you have any thoughts on that? No, I think that's right. It'll be dependent on what we see in the market from an acquisition perspective. It'll be dependent on economic conditions in our key markets. I think time is in our favor here. We're excited to have a very different balance sheet. We had to customize the hold price and we started to Adrian with two overhead stocks.
to show our investors next quarter. And we'll make good, smart decisions on capital allocation as this year and next year progress.
next quarter and we'll make good smart decisions on capital allocation as this year and next year progress. Okay, fair enough. Thank you.
Thanks Steve. Operator, I think we have time for one more. All right, one moment. Our last question is going to come from the line of Michael O'Brien with Wolf Research. Your line is open, please go ahead. Hi, good morning guys. Yeah, most of my questions are already answered.
One quick one. You guys talked about in the past of putting your price increases through. I just wanted to confirm if they're all through for the year, or can we expect more in the quarters ahead? I just quickly noticed that your cost of goods sold is a little higher than normal. I was just wondering when those margins would normalize. Thank you. I would say I don't see any material additional price increases based on inputs where they are now.
it is essentially gone now, so that will basically reduce and improve margins in Q3 and Q4.
Okay, great. Thank you. Thank you. Thank you. And I would like to turn the conference back over to Cecil Quater for closing remarks. Thank you. With that, we will conclude our conference call. Thank you to David and Jeremy. 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.