Q3 2023 Spectrum Brands Holdings Inc Earnings Call
[music].
Good day and thank you for standing by welcome to the third quarter 2023 Spectrum Brands Holdings, Inc Earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to answer questions. During the session you will need to press star one one on your telephone you will hear a message of dicing. Your hand this waste to withdraw the question simply press Star one again, please be it.
Dice that today's conference is being recorded I would now.
Now like to hand, the conference over to the Vice President of strategic Finance and enterprise supporting Russell Curtin.
Good morning, everyone and welcome to spectrum brands Holdings, Q3, 2023 earnings conference call and webcast I'm Faisel Cotter, Vice President of strategic Finance and enterprise reporting and idled 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 section of our website at Www Dot spectrum brands Dot com.
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, Our 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.
Based upon managements current expectations projections and assumptions and are by nature uncertain.
Actual results may differ materially due.
So to that risk spectrum brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August 11, 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.
We assume no obligation to update any forward looking statements.
Also please note that we'll 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 filing which are both available on our website in the Investor Relations section.
Now I'll turn the call over to David Maura Davis.
Thank you first of all good morning, everybody welcome to our third quarter earnings update and I want to thank all of you guys for joining us today as usual I'll begin with an update of the company's strategic initiatives, followed by an overview of our operating environment.
Jeremy will then provide a more detailed financial and operational update including a discussion of the specific business unit results I'd like to start today's call by thanking and congratulating our spectrum brands colleagues around the world for all their efforts and tireless dedication to the company I'm very proud of the spectrum brands team for managing through these unprecedented challenge.
Does this year, including significant inventory demand volatility from our retail customers and the unanticipated Doj lawsuit to block the sale of our Ath <unk> business unit, our retail customers inventory management strategies have made it exceedingly difficult for our business units to accurately forecast sales.
The lawsuit and protracted timeline for the closing of the sale of H H I imposed a number of challenges, including executing our business strategies, maintaining employee morale with the uncertainty of the transaction and adjusting our operating and working capital use strategies to comply with covenants under the H H I R.
Operating transaction agreements and our debt instruments.
I'm truly grateful to the spectrum brands team for managing these challenges in getting us to the close of the H HR transaction, which has placed us in a materially better position to deliver on our operating and strategic plans for our company.
Net debt free company.
We ended the quarter with $2 $9 billion of cash in the bank and total debt of $2 1 billion.
As we had indicated during our last earnings conference call. We've begun the process of deleveraging our balance sheet and we have repaid $1 $1 billion of bank loans since receiving the H HR sales proceeds. We also received board authorization for $1 billion share buyback plan, and we entered into and funded a $500 million.
Accelerated share repurchase program that continues to transact in the market today.
Additionally, since the end of our quarter, we have repaid another $450 million of our outstanding debt by calling our five and three quarter percent 2025, senior secured notes, which were callable at par.
We're going to patiently and thoughtfully explore various options for the use of the remaining proceeds while we continue to earn investment income on our cash balances at rates that are well above our average cost of debt.
On the strategic front, we remain committed to finding strategic and organic ways to enhance the value of our home and personal care business. We are very focused on turning that business around improving its profitability, while we continue to explore strategic options.
Now moving to our operating environment and financial results I'd like to focus on two key messages.
First we are facing further short term headwinds that are driving additional pressure on our topline, particularly in our home and garden business that said, we remain confident in the long term the long term trajectory of our businesses and we are seeing strong sequential profitability improvements.
Secondly, our cash flow focus has paid off and the company's balance sheet has never been stronger. We are now able to make decisions that are going to set up the business for long term profitability and success.
Building on the first theme cooler than expected weather conditions and greater than expected reduction of retail inventory levels negatively impacted our third quarter sales in our home and garden business.
We now expect this season and home and garden sales to be worse than we previously anticipated. We also continue to see pressure in the home small home appliance space due to lower consumer demand and continued higher than expected retail inventory levels. Our financial results reflect these conditions as our total sales dip.
Climb 10, 1%, while organic sales declined nine 7%.
Jeremy will provide more details by business unit in his comments. However, we are seeing the benefits of our earlier actions on cost reductions and price increases that are sequentially, improving our gross margin rates on the cost side, we remain focused on simplifying our business model and reducing costs further to operators.
As a leaner organization with a renewed financial discipline to that end, we are seeing the benefits of our fixed cost reduction efforts in fact, our EBITDA margin increased by over 600 basis points sequentially to 13, 4% in the third quarter with all the cost actions in place. We believe we are well positioned to face. These.
Short term headwinds, while maintaining our key capabilities necessary to continue to now invest in the long term growth of the business.
If I could build on the second theme for a moment you may recall, we started the year with our end markets and decline, especially in the home and personal care space and our leverage peaked at over six times. During this fiscal year, our immediate focus at the beginning of the year was therefore on cash flow generation and cost.
Management to the detriment of our sales and EBITDA growth on that front, we have delivered strong performance by reducing our inventory levels by over $250 million since the end of fiscal 'twenty two.
As I mentioned earlier the completion of the <unk> sale. We are now in a net cash position with the strength of our balance sheet and our current cash balance we have made the decision to discontinue our participation in various receivables factoring and early pay programs that we have historically taken.
The advantage of to shorten our working capital cycle.
Although these programs are a great vehicle when they're needed they come at a cost and that cost has been increasing with the backdrop of a much higher interest rate environment. We expect that the exit of these programs will result in onetime operating cash usage of over $250 million in the current fiscal year and potentially another 100.
We also continue to have some excess inventory, particularly in kitchen appliances, we are evaluating various alternatives to ensure we can improve the health of our inventory as we get ready to enter fiscal 2024 move.
Moving to slide seven and our high level fiscal 'twenty three earnings framework, we remain pleased with the earnings performance of our global Pet care business and we continue to see improvements in the home and personal care business. Despite the headwinds in its end markets. We also remain very confident in the long term strategy for our home and garden business.
But we do expect this to be a difficult year for this business unit due to the cooler than expected weather and retail inventory related sales declines given the additional pressure in the home and garden business in the second half of this year, we expect to be towards the lower end of our earnings framework, excluding the investment income from the <unk>.
Jai proceeds.
Now I'll, let you hear more from Jeremy on the financials and specific business unit updates and insights I will turn the call now over to you Jeremy.
Thanks, David Good morning, everyone, turning to slide nine and a review of Q3 results from continuing operations.
I'll begin with net sales, which decreased 10, 1%.
Excluding the impact of $3 5 million of unfavorable foreign exchange organic net sales decreased nine 7% from lower consumer demand and hard goods and consumer durables and reduced customer replenishment orders as they remain focused on inventory reduction, particularly on home and garden kitchen appliances.
Gross profit decreased $12 $5 million with the reduction in volume while gross margin of 35, 8% increased 210 basis points from a year ago from improved pricing cost improvements and favorable mix.
Operating expenses of $388 $2 million increased about 60% with the increase driven by the recognition of an impairment of HBC goodwill of $111 million and intangible asset impairments of $54 million.
All set by the positive impact of fixed cost reduction efforts initiated in the prior year and that continued during the first half of this year as well as overall spend management.
The operating loss of $124 $7 million was driven by the impact of the sales decline and the goodwill and intangible asset impairment charges I mentioned.
The GAAP net loss and decrease in diluted earnings per share were primarily driven by the increase in operating loss and higher interest expense.
Adjusted EBITDA was $98 5 million increasing despite the decrease in volume due to the positive impact of pricing.
Cost reduction efforts overall spend management and investment income of $5 $3 million from the Haj proceeds.
Adjusted diluted EPS increased by 21 to <unk> 75 per share driven by higher adjusted EBITDA and the reduction in shares outstanding.
Turning to slide 10-Q, three interest expense from continuing operations of $38 $9 million increased $12 9 million due to a higher interest rate on our variable rate debt and $8 6 million of noncash write off from our debt repayments.
Cash taxes during the quarter of $9 $9 million were $3 5 million higher than last year.
Depreciation and amortization from continuing operations of $22 6 million was $2 8 million lower than the prior year and.
And separately share in incentive based compensation increased $5 5 million.
Capital expenditures were $18 4 million in Q3 versus $20 9 million last year.
And cash payments towards strategic transactions restructuring related projects and other unusual nonrecurring adjustments were $10 3 million versus $29 3 million last year.
Moving to the balance sheet. The company had a quarter end cash balance of $2 9 billion and $587 million available on our $600 million cash flow revolver.
Total debt outstanding was approximately $2 1 billion, consisting of $2 billion of senior unsecured notes and $89 million on finance leases and other obligations.
Additionally, we ended the quarter in net positive cash position compared to pro forma net leverage of six three times at the end of the previous quarter.
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 global Pet care, which is on slide 11.
Reported net sales decreased six 2%.
Excluding favorable foreign currency organic sales decreased six 4%.
The net sales decline was largely driven by continued softness in the global Aquatics marketplace.
Especially in the subcategories of equipment and environments, which had benefited from higher than average pandemic driven demand.
In addition to lower aquatic sales our North American sales were also adversely impacted by our aggressive portfolio management activities, which resulted in the decision to exit several nonstrategic categories, such as waste management and the discontinuance of hundreds of lower profit Skus.
These activities will reduce our North America active planned item count by nearly a third.
And while the impact from a top line perspective as a purposeful headwind. We are very pleased with the effect. This is having on margins turns and cash flow.
Sales in EMEA increased due to growth in the companion animal category, mainly driven by our dog and cat food sales, which more than offset similar declines in aquatics.
All of our planned price increases in EMEA announced during the first quarter have now been successfully implemented with the last few customers implementing pricing early in the third quarter.
Across all regions sales were helped by the <unk> impact over the multiple pricing actions taken throughout last year and the benefits of the new price increase has taken this year.
On the cost side, we continue to experience some net inflation in line with our expectations with declines in freight rates, partially offsetting material energy and labor inflation.
We will continue to closely monitor these input cost trends and strategically price as necessary.
On the innovation front in the U S. We are excited to share that our new cat treats line officially became available on truly dot com and we will soon be expanding to other retailers.
This is our first foray into the cat treats category in the U S, which is roughly a $2 billion category.
The new lines are anchored by three patented innovations.
<unk> a two in one toy entry sale.
<unk>, a tasty interactive spoon feeding treat and triple flavor kebabs, a long lasting play time tree.
Staying with the theme of Cat innovations in EMEA and we've also expanded our imes vitality and I'm delight cat ranges and recently launched a new line of Eukanuba wet cat food.
The cap nutrition and treats markets are some of the fastest growing categories in the marketplace. So we're excited about the long term growth potential of all of these new product expansions.
Adjusted EBITDA for GPC increased by 31% to $53 6 million.
The increase of $12 $7 million was primarily driven by favorable pricing, including the incremental pricing actions in EMEA.
<unk> of low margin Skus and our continued focus on cost reduction measures, including the fixed cost restructuring, we initiated last year and further actions during the first half of this year.
This was partially offset by lower volume.
We remain cautious about certain categories within the pet specialty channels, such as aquatic environments as the rates of new entrants settled to at or below pre pandemic levels.
But we expect the positive trends in companion animal consumable categories to mostly offset these pressures.
Overall, the category fundamentals remained strong within consumables, especially nutrition based categories.
This is encouraging as our business is becoming more aligned to consumable product consumable products for your pet which represented over 85% of our revenues in Q3.
As the margin structure continues to improve we are shifting our focus to strategically investing more in advertising and trade promotion to engage consumers drive topline growth and increase our share.
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 and innovative products to drive demand for our portfolio of leading brands.
Our pet business as a historically recession resistant business with continued growth potential and we remain bullish about the continued prospects for this business.
Moving now to home <unk> Garden, which is on slide 12, net sales decreased 6% in the third quarter, driven primarily by cooler than expected weather conditions across several key regions.
Which led to soft Pos and lower sales from replenishment orders from our key retail partners.
The lower Pos.
Especially in May and June also drove retailers to continue to be conservative with their inventory planning and to further reduce inventory in the quarter.
Adverse weather conditions, particularly in the southeast negatively impacted the overall pest controls category Pos despite.
Despite those conditions, we are experiencing growth in our controls category as we continue to win with consumers with our Spectre side brand.
Leveraging our strong brand positioning that delivers great efficacy at great value for our consumers.
However, we are facing some pressures in the household category with our hotshot brand as the competitive landscape has become more challenging with key competitors heavy investments both in promotions at the retail level as well as top funnel advertising.
The overall volume decline was partially offset by the impact of price increases.
As I mentioned earlier the shift in retailers strategy to maintain significantly lower inventory levels compared to last year continued to play out on our third quarter results.
We expect this trend to continue and now expect retailers to target historically low levels of inventory for the end of the season.
This continued inventory reduction will pressure our sales expectations in the fourth quarter.
That said July has seen a good recovery of Pos driven by both incremental support for our brands, which are trending positively so far in the fourth quarter as well as warmer weather.
Sales of cleaning and restoration products experienced some growth in the quarter.
POS for the category remains challenged as demand for cleaning products continues to decline post COVID-19 and our performance in the category remains below our expectations.
We are planning to increase investments far rejuvenate brand to drive topline sales as part of our renewed focus on driving long term growth.
We will leverage positive momentum in the market as we see consumers continue to recognize the efficacy and strong value of our products.
Rejuvenate has been ranked as a best value for floor cleaning systems by better home and Garden magazine.
Significant commercial innovation continues to be rolled out across our home and garden portfolio.
And controls, we're expanding the presence of our spectra side, one shot platform across several other products.
This is a strategic innovation that will allow us to bring superior performance to results driven consumers, but keep our strong value model in the market.
And repellents are new Zoe mosquito repellent devices cutter eclipse and repel realm continue to gain traction with consumers.
We will expand the presence of these product lines into several new national accounts, and we'll continue to build excitement for this new product offering.
We are carefully monitoring Pos and coordinating with our retail partners to ensure we can appropriately supply the products to meet consumer demand, but as I referenced earlier, we expect further retailer inventory reduction actions in the fourth quarter in parts of the channel.
Adjusted EBITDA for our home and Garden business was $38 6 million.
EBITDA decrease was primarily driven by the sales decline.
This was partially offset by positive pricing.
Benefits of fixed cost restructuring and cost improvement initiatives.
We experienced higher product costs from raw materials and labor in line with our expectations.
As we look forward to the balance of fiscal 'twenty, three we expect fourth quarter sales to be impacted by the continued retail inventory reductions as a result, we expect sales to be down for the full year.
Although we believe the fundamentals of the consumer market remains strong. This is a difficult year for our home and garden business, because because of the challenges posed by the retail inventory strategies.
Okay.
And finally home and personal care, which is slide 13.
Reported net sales decreased 16%.
Excluding the unfavorable foreign exchange impact of $4 3 million.
Net sales decreased 14, 7%.
The unfavorable foreign exchange impact is mainly driven by currency volatility in Latin America.
The organic net sales decrease was driven by continued category decline from lower consumer demand and kitchen appliances and retailer inventory reductions in North America.
Overall global sales increased in the personal care appliances categories.
Sales in the EMEA region registered double digit growth in both personal care and kitchen appliance categories. As we continued to win in the marketplace and gaining share through growth in the E Comm channel.
Sales in Latam and APAC also posted strong growth.
However, in the North America business continues to operate in a difficult competitive environment with the small kitchen appliance market down mid to high single digits in the quarter.
The retailer inventory.
On air Fryers, and toaster ovens as demand remained well below pandemic highs.
We expect continued pressure for the remainder of the year for these product lines as retailers worked down inventory through surpassed suppress replenishment orders.
Consumers are also looking for deals as retailers and competitors maintain the increased level of promotion in the marketplace, which will put further pressure on our results.
Adjusted EBITDA increased to $11 4 million.
The higher adjusted EBITDA margin was driven by lower cost inventory and positive year over year pricing.
Ocean freight rates have continued to decline from the pandemic high levels and we are driving further margin improvement through various cost improvement initiatives, including the fixed cost restructuring we've undertaken over the past two years.
This was partially offset by lower volume and the impact of unfavorable foreign exchange rates.
Looking forward to the remainder of the year, we continue to expect softer consumer demand, particularly in the air Fryer and toaster oven categories and.
And expect a continued challenging competitive environment in North America as retailers continue their focus on inventory reduction.
As such we will stay focused on actions to reduce inventory in the channel as well as our own inventory.
Commercially our renewed focus remains on driving fewer bigger better consumer relevant innovations that enhance our current market position and simplify the operating model of the business.
We'll turn now to slide 14, and an update on our expectations for 2023.
As David mentioned earlier, given the additional revenue pressure in home and garden in the second half of the year, we expect to be towards the lower end of our earnings framework, excluding the investment income from the Hai proceeds.
Additionally, we expect approximately $30 million of investment income in the fourth quarter based on the current interest rate environment.
Turning to slide 15, now depreciation and amortization is expected to be between 105 and $115 million, including stock based compensation of approximately $15 million to $20 million.
Full year interest expense is expected to be between 120 and $130 million, including approximately $16 million of noncash items.
Cash payments towards the restructuring optimization and strategic transaction costs are expected to be between 65% and $70 million.
Capital expenditures are expected to be between 55 and $65 million.
Cash taxes, excluding any gain on the sale of HHS.
Are expected to be between 25 and $35 million.
For adjusted EPS as usual, we use our tax rate of 25%, including state taxes.
To end my section I want to Echo David and thank all of our global employees for their strong efforts. During these challenging times that we're staying committed to our long term strategic initiatives.
Now back to David.
Okay. Thank you Jeremy Thanks, everybody for joining us on the call today.
I'd like to take a couple minutes to recap the takeaways here on slide 17.
First with the successful close of the Hh Ourself, we are now operating in a net cash position compared to over six times leverage in the previous quarter, we've already taken steps to deleverage our balance sheet and are returning capital to our shareholders. We are continuing to explore the deployment of the remaining proceeds to drive the best outcome for all of our stakeholders.
This transaction also has brought us closer to our long term goal of becoming a faster growing higher margin pure play global pet care home and Garden company and will allow the team to now devote the resources too and prioritize long term growth of our remaining businesses.
Second with the successful close of H HR, we are even more focused on our core businesses and we have successfully pivoted the teams to focus on profitability and long term growth.
Last we are facing additional headwinds in our home and garden business related to weather and retail inventory levels that are more that were more severe than we expected.
<unk> confident in our long term strategy here and our ability to deliver value to our customers. We are therefore, maintaining our earnings framework for fiscal 'twenty three excluding investment income, but expect to be toward the lower end of that guidance range I want to close by reiterating that I'm optimistic about the future of our company and I believe we are well positioned to execute.
Our operational goals and return our company to earnings growth in fiscal 'twenty four I'm very excited about the strategic pivot after the sale of <unk> and I want all of us to know that the future spectrum brands is bright I will now turn the call back over to festival for questions. We look forward to hearing from you.
Thank you David.
Operator, we can now go to the question queue. Please.
Oh, sorry mine to get into queue simply press star one one and wait for your name to be announced.
The other question simply press Star one again.
For our first question.
It comes from Bob <unk> with CJS Securities.
Yes, hi, good morning, it's Pete Lucas for Bob can you talk a little bit about how you think about a possible sale divestiture of HBC, what are the likely options and potential timeline if any.
Yes look I mean, we definitely want to stand that up and create a separate business.
We were optimistic we can get that done sooner, but we clearly entered a year kind of unprecedented.
I would call it a post COVID-19 hangover, where everybody bought a lot of durable goods. So I think in the last year, you can definitely see money.
Flows out of durables, and consumables and I think particularly here in the U S. Given the stimulus payments you just see a lot of money flowing into the services space.
And so you have airlines are full your restaurants are full.
People are traveling to Europe .
I heard there's a lot of Americans in Italy. This year. This summer, but we do think that given the bankruptcy of one of our competitors in the space stress on some of the other players.
This should revert a little bit more towards the mean and we want to be responsible when we spin merge.
Or put this unit up on its own and we needed to be financially healthy. So we definitely want to take the next couple of quarters to see if we can't get the earnings profile of our appliances business on a much better trajectory and we'll continue to assess as we as we enter and go through fiscal 'twenty four but our strategic objectives remain the same.
I would just say, it's been a little bit delayed.
Great and then jumping to the M&A environment. What are you looking for in terms of acquisition criteria and how do you evaluate that versus additional share repurchases.
Yes, I don't see anything in the market that we want to buy at this point in time.
Think our shares are cheaper than anything I could possibly buy outside the company.
I think we need to stick to our knitting here I think we need to.
Yes.
Given the fight with the government.
Given the unprecedented pandemic, we had inflation problems with supply chain problems.
We're really looking forward now to a clean balance sheet being able to invest in revenue growth and revenue drivers and really getting what's under our house here.
Not only stable, but growing again and that's really the priority for fiscal 'twenty four.
And then last one for me you discussed it a bit in terms of pet and home and garden as far as the pre pandemic.
Just wondering about the key drivers for both that we should think about.
And I'll, let al what I think of the top notes and ill, let Jeremy or vessel take the take the rest but.
Look I think the pet care business is phenomenal space and there was definitely a lot of adoption during COVID-19 and you can read news articles and people trying to get rid of pets, because discretionary income is getting pinched, but we see the companion animal space has continued in growth mode.
And we took we had to take a lot of pricing because of inflation and that that hurt unit volumes in.
Being a six times levered credit and higher for the bulk of this fiscal year, we just.
We didn't have the muscle we wanted to kind of really punch growth drivers and so I think we can really kind of get back on to marketing our brands investing in the brands.
That's got a lot of innovation and it's pretty exciting I know there was a press release I think the pet team put out a couple of days ago.
Punch line is who says you can't play with your food and there's some really exciting innovation and really high quality treats coming to the fee line cat market for us.
Again, if you are listening on the call and you've got a cat. Please go to chewy and check it out it's under the Meow Meow.
<unk> do we brought over from Europe with the arbitrage Good Boy acquisition, which has been a fantastic acquisition for us, but look we think we think pet should be in growth mode. In 'twenty four we clearly got a little bit of headwind from the durable fish tanks being higher priced in people.
People pulling back there.
But that's not an excuse we want a view of <unk> growth as well and we've got some initiatives. There that we can talk about as we get into 'twenty four I think look home and garden.
Super disappointed in it this year I really had much higher expectations for it I think we all did I think the issue is that as you know when you sell the bulk of your product annually in a 90 day period.
And it sounds like an excuse and trust me I wish it wasn't the case, but I just don't think our sales team saw the amount of inventory that retailers wanted to move and get get back down to kind of pre 2019 levels and so I think while everyone was home during the pandemic with clearly everybody was in their yards and one law.
Out of our product and our retail customers ordered a lot of our product and so we have tremendous factory shipments.
In those days, but I think there's a hangover here now where.
Everyone's on a plane to Paris this summer.
The big box guys, a lot more inventory than our sales team had visibility to and they needed to destock dot and so that really crushed our our factory shipments.
Production.
In our factory wholesale sales to them. In addition to the fact that weather was absolutely.
It was not cooperative.
We've definitely seen a turn in the business July July was a much better month, but it's just it's too late in the game to say of the season for us.
Very helpful. Thanks, I'll jump back in the queue.
Thank you one moment for our next question. Please.
It comes from the line of Peter Grom with UBS.
Thanks Peter.
Joining me here, but how are you.
And I'm feeling a lot better feel a lot better going to bed with cash in the bank.
It sounds like.
Maybe just one quick housekeeping item the $250 million impact from exiting receivables factoring that you mentioned did any of that occurring in the third quarter or is that all still yet to come.
Pretty small amount in the third quarter, but most of it's in Q4.
Okay, and then I guess my bigger question was just I was hoping to get some perspective.
The earnings power of the company not necessarily long term is.
David you've kind of articulated in the 400 million dollar number for some time, but just as we think about where we are exiting this year well below that how much of the gap do you think you can actually close in 'twenty four.
Previously mentioned to capitalized variances, which are pretty substantial but just any thoughts on.
How we should be thinking about getting back to that $400 million number any sort of timeline around that and then just maybe any sort of building blocks you would emphasize at this point for 'twenty four would be great. Thanks.
Yes look we're not we're not going to shy away from it I think.
That was clearly a premature statement on my part I didn't see the massive downdraft in earnings debt.
Impacted our small appliance business sides.
Pretty unprecedented what's going on in that industry and I certainly.
Wish we were better at forecasting our home and Garden factory sales I think it's a multi year process at this point.
We have got to get our operating house in order I'm not pleased with our operating results at all this year and.
We've hired some new talent and we've got some new strategies in place and we've got some new product launches, but I don't want to get out in front of our skis. This company has got to note that the balance sheet fixed I think you can look at 'twenty three is the year of getting our house in order from working capital Dave.
Dave Gabriel we brought him in and did a fantastic job of squeezing.
Getting healthy on the inventory lines.
Obviously, the close of HHS kind of puts you know tips us over the edge here with.
We have more cash than debt and we're continuing to delever the balance sheet and we're buying back shares to return cash to shareholders. In addition to paying a dividend.
I think our work is cut out first in 'twenty forward, we got to regain some credibility on the operating side. We've got to drive revenue. We've got a I think if you look at this quarter you can see hey.
Maybe you can give management a little bit of credit we did start cutting costs a year ago.
We did take pricing and you can see a pretty big spike in our in our margin structure and so if we can maintain that healthier margin structure and really get this top line moving in the right direction.
I think that's what's best for all of us as shareholders, but we've.
We've been out in front of our skis and we need we need to.
We need to be conservative here, and we need to we need to let the numbers talk as opposed to these conference calls so stay tuned.
Thanks, So much I'll pass it on.
Thanks, Peter Thank you.
Please for our next question.
Is from the line of Chris Carey with Wells Fargo Securities.
Hey, good morning.
Good morning.
I just wanted to follow up on Peter's line of questioning.
Just about next year.
I think it's totally reasonable.
To speak to more kind of conservative facing into that earnings power, which.
We make sense I guess I'm also just looking at EBITDA.
EBITDA.
Up almost 20% next year Youre talking about the need to reinvest drive topline.
What is the balance between.
Delivering margin band.
Getting your top line going again to kind of build a more durable long term model fairly with your cash balance you have room.
You got to invest to get some of that momentum going again, so I just wonder how you think about the balance.
Top line and EBITDA.
The context of what seems like pretty substantial growth expectations for EBITDA going into next year.
I mean I'll, let the team take that I'm just.
I think I think you understand for me. The 23, we got the balance sheet fixed in 'twenty four we want to get the P&L effects.
Yeah.
Everything is not a straight line.
I certainly want to see better performance, but I, certainly don't want to Overcommit.
Don't like taking numbers down.
I didn't enjoy doing that this year and I'm sure as Hell don't want to do it next year and quite frankly, that's the that's the the spin of the public company model as you try to do your best to give guidance because that's what everybody expects but.
Running a business for long term health is sometimes damaging the quarter's end.
The first quarter of this year into the second quarter. We saw that this is going to be a tougher year than we thought and we started running the business for cash and.
Working capital because when you get in trouble with banks on covenants like some of our competitors are right now that will put a lot of distraction on organization. It will limit the resources you can put into to grow on your topline.
And it's not a place we want to be and so we spent the year.
Running the business to really drain our inventory lines to get healthy to get our inventory turns up I.
I think that's the one area we did great on.
I don't give us so I don't give us very good marks on the sales line or the EBIT line obviously.
But I want this to be a different story next year, but I very much do not want this team to get over its skis.
We want to.
Give you the best outlook, we can but we need to get in the business of building credibility.
Jeremy Yes, it would be.
You want to get involved there, yes, Chris look really good.
A good question I understand the question, obviously, we're a quarter away from providing our thoughts on fiscal 'twenty, four which will do in November .
But I think it's important to look at each business because they are all in a little bit different place right. So if you look at the third quarter results with with the global Pet care business.
EBITDA above $50 million I think we're getting back to where we wanted to be as we expected and profitability in that business and now it's really about growth.
The quarter, we were down a little over 6% organically about half of that was just from SKU rationalization. So purposeful.
And we're starting to annualize the impact of the aquatics environments being down big so.
I think there is a path to returning to topline growth and as you can see third quarter results. It leverages well in that business. So.
I think we're in a good place there and go home and garden as always it's a complicated business had a difficult business to forecast for us for you guys for shareholders based on the weather what we do know is that.
That our sales were significantly below our Pos this year based on the retail inventory reduction, we will thoughtfully analyze that and do our best to.
To estimate what we think 'twenty four it looks like we will talk more about it in November but fundamentally we like the business, we'd like to consumable nature of it we like the.
The efficacy and the value for consumers and we think it's an excellent trade down in difficult economic times. So I think it was good growth potential there to get back to where we've been in the past, but just not quite sure how long it takes to get back to the previous peak EBITDA levels, but will give more thoughts on at 90 days and then HBC.
David and I talked about a lot in our prepared remarks, it's really at the tail of.
The different regions in the world in EMEA.
Tam APAC it really all recovered from the post pandemic glut of inventory and kind of lack of people.
Being at home and actually I think as we can.
<unk> talked about they all posted growth on the top line and you can see our third quarter results improved substantially from an EBITDA perspective from Q2 to Q3. So we're pleased with that but we still got to deal with this U S issue and it's a tough issue it's affecting us all of our peers you've seen bankruptcies in the space. So it's not a.
24 full recovery in that space because of what's happened in the U S.
But as it relates also to your question on how do you think about ramping up investment in the brands. The reality is to David's point, we've been pretty handcuffed and we're not now.
Q4, really all three of the business are modestly starting to ramp up investments back in the brands and we will just measure the returns on that very thoughtfully and pragmatically as we go through Q4, and then that will really give.
David and I have the visibility to how much brand investment will authorize for F. 'twenty four because we want to see the return on that so that's that's kind of a fulsome thoughts on again, we can't we can't provide guidance on 2004 today, we're not going to but that's that's kind of the state of the union.
Okay.
Paul just a couple.
Quicker modeling kind of question.
For Q4 would you expect your share count to be quite a bit lower than Q3 of your book the ASR it sounds like that.
Continuing into this quarter, while the ASR rebound this quarter I mean sure we're only down five.
5 million approximately quarter over quarter should they decline substantially in Q4 versus Q3.
And then the second question and then ill be done Okay. Yes go ahead go ahead.
Yes, So we've retired five 4 million shares.
Started the ASR I believe that was on June 'twenty, one 'twenty two.
But the share count in the quarter as an average share count across the quarter. So you didn't get much of an impact of that with just eight or nine days.
So you will see us substantial step down to the tune of about 5 million share count.
In Q4, regardless of whether the ASR is completed.
We don't have we don't have direct visibility to when that will be completed but that will happen, regardless and thats. The whole point of the ASR is you can retire 80% of the shares upfront.
Okay and then.
The second question that I have done is just on free cash flow. So the factoring program is mostly in Q4 Q3 did look weak and I guess.
Im just trying to understand.
Historically talked about converting about half of EBITDA doesn't sound like obviously, that's not happening this year and probably not next year and you had $100 million.
Factoring of our small but.
Would you expect to get to that number.
Or be able to get close to that number excluding kind of the impact of the factory. That's it from me. Thanks.
Yes, we do we do.
Fundamental look we've had a good year working capital right first nine months, we took out $250 million of inventory <unk>.
Adjusted continuing operations. So we're really pleased with as David mentioned, David Gabriel and the broader team there.
On these factory and early pay programs a lot of companies in our space and participate in them.
But with the raise the increase in interest rates I mean, the cost of those programs is well over 6% and so it just makes sense to and with net cash on the balance sheet to exit those programs and benefit earnings so but without that yes cash flow is very healthy.
You just got to look at it.
You've got to look at it as a capital allocation decision.
Some of these facilities. This company has been on for decades.
It's just we've got.
Zero interest rate environment for the last 12 years.
Yes.
12 months, it's kind of shot up and so.
If I can earn by paying off one of these facilities, if I can earn more than 6%.
Good use of capital, but it is one time and I think it's the best.
If I owned the company personally and this isn't I would make and that's what we're doing.
Okay. Thanks, a lot.
Thanks, Chris.
Thank you one moment for our next.
Question. Please.
When he comes from the line of Iron Zaffino with Oppenheimer.
Okay, great. Thank you. Thank you very much.
Can you give us an update on inflation expectations.
How that's tracking versus what you initially told us.
And then maybe even by division right because.
I would imagine HCC is large freight.
And inflation, that's now sort of come down, but you mentioned that there's a there's some offset so maybe you can kind of give us a.
An idea of what's going on on the inflation side. Thanks.
Yeah, I mean honestly I think the year is progressing pretty much as we expected it would.
The inflation started to wane Q4 last year, and we entered the year with that $55 million or so of excess cost on the balance sheet as we talked about that was all flushed in Q1, and Q2 and we saw gross both gross profit and EBITDA margins expand nicely from Q2 to Q3 sequentially.
So as we look forward the inflation headwinds are actually pretty small.
Subsiding.
Some materials.
But energy Labor remained high Ocean freight down so it's kind of a mixed bag out there, but as we expected so.
Honestly as I look forward to F. 'twenty four I don't see it being much of a conversation other than the first half year over year, we should have tailwind from not having that excess cost on the balance sheet entering F. 'twenty four.
Okay. Thanks, and then.
On HTC and a potential separation I mean do you think if you fix the fundamentals.
You could then.
Spinning off or do you feel like you need to get more scale do a JV.
Or any other type of alternative.
Look I think I think that we tried in the past with strategic partners. I think there are synergies there theres a lot of companies in this space and they have identical cost structures and so it's not the most efficient thing.
'twenty appliance companies also on toaster ovens with the same supply chain distribution.
And our network. So I was kind of hoping we could.
Have something that was synergistic and added more value to us as equity holders, but no. If it comes to it I mean, the one thing the board can control spend and we've been preparing for that and so if it comes through it that's what we'll do.
Okay. Thank you very much.
We got we got to spend something out that is healthy though right.
Understood. Thanks.
Thank you.
Go ahead please.
Alright, and our next question comes from the line of Brian Mcnamara with Canaccord Genuity.
Hey, good morning, guys. Thanks for taking our question.
On Destocking I'm curious how much visibility you guys have into the wholesale channel inventory that we've as we've heard from several other companies are related and unrelated at the worst of Destocking is largely behind US can you give us a sense of sell in versus sell through particularly across home and garden and HBC.
Yeah, I mean, I think it's a fair assessment that most of it is behind the markets I think the exception.
Even the majority of it is behind the U S kitchen appliance market, but it's still out there and a challenge there and home and garden.
I don't think we've seen a significant change in retail strategy during the quarter, but we did see the lower pls than everybody expected and.
And that just means it's taken longer for those inventory positions to to dwindle out.
As I said earlier I think we'll talk more on the next call about what we think sell in versus sell out has been in home and garden, but.
The areas that we still see challenge will be north American kitchen appliances and.
And a little bit in home and garden.
Thank you.
Thank you thanks, Brian .
Okay.
One moment please.
Yeah.
Our next question comes from the line of Kim <unk> with <unk> Crespi Hardt.
Hi, Thanks for taking my question I, just wanted to follow up on having the product.
Question.
Whats kind of your expectation for each each business for this year.
In terms of growth.
Growth or declines, yes. So if you could give us kind of what your expectation for Pos for home and garden for Pat and at home and personal care is for the year. Just so we can have a better idea of what the destocking impact is for the year.
Yes, I mean at this point there is still a little bit of seasonal after home and garden, but it's.
It's flat to down low single digits I think for the year, but we have seen pockets of high single digit down and we've seen pockets of high single digit up as the year has gone on and GPC.
Tale of two cities really in.
In companion animal in consumables, which is about two thirds of our business are a little better we've seen low single digit growth blended but aquatic aquatics has been down double digits with environments down.
25% dragging the whole business down I think a lot of that is behind us as we get into Q4. So I think Q4 was a little bit better.
And then the organic growth performance, we saw in Q3.
And then in <unk> as we said on the call. The whole market. We think has been down high single digit to low double digit <unk>.
Particularly here in North America, and when we look at the peer group and ourselves basically organic shrink of 10% to 15%.
Which is.
It's probably slightly worse than what actual Pos is in those markets, but it's we don't have.
We don't have great visibility to it.
Great and then on the exit of certain categories for global pet.
When did that start to impact sales for the business and should we expect kind of a similar impact going forward.
It's really a late Q2 and Q3 set of action items like I said earlier it was about half of the organic shrinks about a 3% ish.
Impact and it will continue at that rate for probably another.
Two quarters, or so, but again as I said earlier I still expect sequentially that the organic.
Organic topline performance will will improve.
Great. Thank you.
Thank you.
Thanks.
One moment for our next question please.
Okay.
One moment, please alright, and he is from Olivia Tong with Raymond James.
Great. Thanks, good morning.
Hi, Olivia.
Hi.
Clearly the environment is pretty tough to hear some of that.
Is out of your control, whether theres only so much Mike and predict on that but now that you have the bandwidth both from a financial and quite frankly headspace perspective, what's your view on investment levels from here not only just for sales, but also to help with forecasting and inventory management as well.
Well look I, we've we continue to make investments in this company throughout the last couple of years, even with where leverage was an uncertainty in the economy.
We put in SAP IBP and our business is I think that has contributed to our inventory performance. This year. So we're very comfortable there.
And.
Think we've talked about before we are in the middle of a new Greenfield SAP four Hana investment.
That is about to go live from a pilot perspective, and then we will rollout over the coming couple of years all of those tools will help us in forecasting and understanding what's happening in our business globally.
At a much quicker more thoughtful way.
And then the reality is we are a consumer consumable consumer business and we can't always predict what pls is going to happen. So we're always going to have that variable out there as our peers and competitors.
Got it and then obviously you're in a net cash position right now you've been very clear over time that your long Form 10-K is two to two five times on a net basis. So after the debt pay down share purchase plan, including the end of the quarter.
We still probably have just under $1 billion in proceeds so how should we be thinking about deploying that into.
That over the next several years.
It depends on where the share prices.
Not really I mean.
Alright.
Okay.
Got it thank you.
Thank you Andrea.
One moment please for <unk>.
Our next question.
And it is from Mike O'brien with Wolfe Research.
Hi, Good morning, guys. Thank you for taking my question morning.
So the first question I have so David you mentioned that Youre not interested in pursuing strategic M&A at the moment.
When we're looking at the June press release, following the Ehi close you guys mentioned strategic M&A as a potential way to deploy capital. So I just want to confirm that you're not looking at M&A right now at least in the near term.
And then the second question I have is regarding your margin. So you guys. Obviously have made material improvement on your EBITDA margins for particularly on the pet care business.
So what I'm looking at EBIT guidance for the year down.
Down mid single digits, giving up a little conservative given that you guys are making.
Some some headway with your margin improvement on the on the pet care business. Thank you.
We have certainly not been conservative enough and so thats. So I'll answer. Your second question. Your first question is never say never learned to never say never in my life. So if something comes along and put its a beautiful asset and sellers' expectations are right. We'll buy it I'm just telling you today I got nothing in my sights and.
I think the share price is the best use of our cash.
Gotcha. Thank you guys I appreciate it.
Thank you and that concludes the Q&A session I will turn it back to <unk> for any final comments.
Thank you with that we've reached the top of the hour. So we will conclude our conference call.
David and Jeremy and on behalf of spectrum brands. Thank you all for your participation.
Thanks, everybody, we'll talk to you soon.
Thank you all for participating in today's conference you may now disconnect.
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