Spectrum Brands Holdings, Inc. (SPB) Earnings Call Transcript & Summary

Good morning, everyone. I'm pleased to welcome Spectrum Brands. I'm joined by Chairman and CEO, David Maura; and CFO, Jeremy Smeltser. Spectrum Brands is coming off a very strong quarter with strength in Pet, and Home and Personal Care and ongoing benefits from the company's global productivity improvement plan, which is designed to provide over $100 million cost savings, all the while dealing with COVID-related supply chain disruptions. I'm going to kick the call over to David for a quick few comments, and then we'll get into our fireside chat afterwards. David, over to you.

Thanks very much, Nik, and RBC for hosting us. Thanks, everybody, for your interest in our company. I need to point your attention to some formalities here in the beginning. Obviously, we will probably make some forward-looking statements during this quick presentation, and so we direct your attentions to Slides 2 and 3 where we have a forward-looking statement disclosure and then also we have some reconciliation of non-GAAP financial measures that we want to bring your attentions to. So with that out of the way, let me ask you to turn your attention to Slide #4, where we basically outline the new Spectrum Brands going forward after the repositioning of the company during fiscal 2018 and into 2019 through the divestiture of our Battery and Global Auto Care businesses. You can now see, we have 4 business units: Hardware & Home Improvement; Home & Personal Care; Global Pet Care; and Home & Garden. And this gives you kind of a breakdown of the business units, the geographic concentration and the concentration within the portfolio of brands. But before we get into the remarks, again, I just want to reiterate and thank the entire team at Spectrum. I really believe, while the external negative factors of COVID-19 for all of us have been challenging and disconcerting and definitely unprecedented, I'm really pleased and proud that I lead a team that has really come together during this time. And quite frankly, wanting to communicate more effectively than ever, which has enabled us to take steps to protect not just our people and our company, but also to really step up our ability to serve our retail customers and consumers and even our communities around the globe. So as we look into the business, we've got 4 different operating companies, but we're extremely fortunate that all these businesses have been deemed "essential" during this time, and all our business units revolve and center around the home. In fact, 3 of our business units have the word home in them and thank God, most of us keep our pets at home. Maybe we should add the word home to Global Pet Care in the future. But that's really empowered us to take a new view of our company and for me to be able to redefine us, our identity to all 14,000 employees is, we're -- we really are a home essentials company. And it's allowed us to kind of seek a bigger purpose in what we do. And so we're not -- we feel the greater sense, a greater responsibility, almost like we're playing for something much bigger than ourselves, and that is we're helping our fellow citizens both in America and around the globe to help cook their meals, whether it's with our Black & Decker toaster ovens, grills, et cetera, our George Foreman grills and appliances in the kitchen as they make meals for their family. As I mentioned, whether or not -- they can enjoy and take care of their pets, we've got our DreamBones, our SmartBones out there. We've got Nature's Miracle that helps clean up a little bit of life's messes. They're securing their residences with our Baldwin, Kwikset and Weiser brands. And they -- Weiser is dominant in Canada. Baldwin and Kwikset are big here. And even our hardware business, as stores have had to be creative about forming lines and keeping people 6 feet apart. We've seen a rebound in our hardware businesses. People need more hinges and screws to make signs and to keep things orderly out in front of their stores. And then obviously, our Garden segment, Home & Garden, when you're out -- when you're at home, you can at least enjoy your yard. And when you do that, you want it to be weed free. We've got an amazing line of products in Spectracide, which does not contain glyphosate and that can rid your yard of weeds. And obviously, with Cutter and Repel that keeps the bugs away and cleans out the insects. And so I think this difficult time has actually brought out the very best in our personnel. We've realized that we're actually serving a much greater purpose as a company. It's motivating all of us to come together in a way we really never have just over these past few months. And to illustrate how Spectrum Brands has been contributing to people's lives and helping people cope and get through the situation, we had a video that we originally wanted to play at this time. We were informed we couldn't do that in this format. But I do encourage you to check the video out. I believe our operations team has uploaded that. It's available for download. I think within these conference materials, but it's also out there on YouTube. I really do encourage you to take a moment to view that. It will not only educate you on our company, but it'll show you the enthusiasm and the passion that the real heroes of the business are embracing, whether that's in our factories, our distribution centers, our front line workers. They're really making this thing happen day in and day out and we wanted to share that with our investing community because we're very, very proud of our people. So on Slide 4, again, to summarize, the new Spectrum Brands were $3.8 billion revenue business. We've got market-leading positions in 4 big categories and business units. And obviously, on the left side, you can see our scale and mix across the 4 units. HHI, which is our Hardware & Home Improvement business is the biggest asset in our company. We have #1 market share positions, as I've said, with Weiser up in Canada, Kwikset here in the U.S. and Baldwin in the luxury segment. And we have the largest installed base in the United States with these Kwikset mid-price point locks in America today. In Global Pet Care, we're doing an -- the team is just doing an amazing job right now in the Pet Care business. We've even seen a big rebound in our Aquatics. We've got a very focused and very talented team here. Right now, we're just trying to chase demand by fixing our supply chains and getting more product. And so we're going full board there. Home & Garden, while it's our smallest unit, it's got an incredible competitive set and quite frankly, competitive moat around it. EPA is a significant mitigator here for the competition entering the space. And again, as I mentioned earlier, we've got some amazing products here in Spectracide, Cutter and Repel. And you'll see a lot more as we move through the next weeks and months as we reinvest our GPIP dollars into new innovations and advertising. I encourage you to kind of follow the -- just as you're driving your car or getting on digital media, start looking for Spectracide and Cutter. The team recently launched hand sanitizer. We've had trouble keeping it in stock. So on earnings call, we told you, it was on amazon.com, it's sold out. We're right now in the middle of working to get it up with a couple of other retail partners. But really, really tickled that the team in Blacksburg was able to pivot, start making hand sanitizer under the trusted Cutter name, 50-year heritage, and you'll be seeing a lot about Cutter as we move forward. Home & Personal Care. Basically, this was a business in turnaround. Just over a year ago, I replaced the entire management team of this unit. And I'm thrilled that today we've got an entire new team there, and they've been growing revenue and EBITDA for the first time in a very long time. Refer you back to the first quarter of this year's numbers. It was really marked the turnaround of this business. There's been tremendous demand for our brands. And quite frankly, the products in this portfolio as people are cooking at home and cutting their hair at home, with our Remington shave kits. And again, our biggest challenge right now is chasing the demand that we have, and so it's a good problem. We're working hard to solve it. We've got a little bit of an air bubble in the supply chain there. But we're fixing that. Geographic concentration after the divestitures, we're now 74% concentrated in North America, which, quite frankly, I like, with 17% of our sales in Europe. Our top 15 brands do account for 80% of our revenue. And obviously, that's where we're putting bulk of our investment dollars that we've been generating through our global productivity improvement program is to really drive these top 15 brands. But if I could get you to turn to Slide 5, I'll try to speed up a little bit. I talked about the repositioning of the company through deleveraging. We did bring our debt leverage from about 5.2x down to 3.1x as we exited last year, fiscal '19. We did stabilize the business as promised. We delivered $567 million of EBITDA last year. That was my goal after taking the CEO position in 2018, where we had a number of operating difficulties. My promise to our investor and -- of our investors and our Board was to stabilize the business in 2019 and position it for growth in fiscal '20, and we did that. I'm very proud of that. We did return quite a bit of cash to shareholders as well. So we delivered on our '19 goals. We ended with net leverage of 3.1x, meaningfully improving the balance sheet. We delivered our EBITDA guidance of $567 million, which was in the midpoint of the range. We did step up cash return to shareholders with about $269 million being returned through repurchases and $85 million dividends paid out. The actions in 2019 simply reflect, a company that's simpler to understand and much more shareholder friendly. These actions were a reflection of meaningful improvement of the company's underlying fundamentals. And that put the -- we really planted the seeds in '19 for growth, in 2020. And if you can turn to Slide 6 now, you can see that in the first half of 2020, we actually grew both top and bottom line for the first time in a while. Our organic sales grew 2%. EBITDA grew over 5%, and that's in the first half. Adjusted EPS grew 127%. The teams have also been significantly navigating headwinds with tariffs. We've disclosed tens and tens of millions of dollars of tariffs that we had to overcome and then obviously, now that the COVID-19 disruption, which was not in our forecast. During the second quarter, I'm really proud of what we were able to deliver in the March quarter. We grew sales over 4% organically. EBITDA grew over 21.5% organically. And if you dig into our gross margin line, you can see an expansion of 170 basis points. That's proof in the pudding that the global productivity improvement programs that we've been doing over the last 12 months have actually hit -- paid our -- we are seeing meaningful savings and efficiencies. Turning to Slide 7. This is a more detailed analysis of what we've been doing over the last 12 months with global productivity improvement. We've committed, obviously, to work through 6 highly coordinated work streams that are delivering about $100 million of gross savings versus our legacy operating costs, and we're using that to create new capabilities within the businesses and drive growth. I think one of the most important aspects of this initiative is, it's allowing us to create and leverage new capabilities to drive product, brand strategies of the individual businesses with really deep consumer insights and data analytics from an efficient service team, that brings together the whole of Spectrum Brands as one company. It really harnesses the collective power and resources of the business. In many ways, COVID-19, while it's an unwelcome challenge, it's kind of accelerated the spirit of this plan, promoting the partnership and collaboration across businesses that units, regions functions that, quite frankly, I'm really proud of. As I've said before, the program continues to be our most strategic initiative at this point for delivering long-term, sustainable organic growth, and we're focused to become a much faster, smarter, stronger company with much more quick aligned decision-making with each -- within each business unit. This is driving a more focused and relevant product innovation road map, and it's because of enhanced consumer analytics and additional R&D processes. Turning to Slide 8. I won't take you through all this, but this is the breaking down, kind of peeling the onion back on the other side, create the savings through GPIP and then invest. And so we've got new capabilities in 3 major areas: Our Comm Ops team, which we can elaborate on later; Global Business Services allows us to simplify, standardize and automate; and then obviously, our Procurement practices, which is really driving the gross margin expansion that you saw in the quarter we just reported. So Comm Ops is probably the area I'm most excited about now, and that's why I was talking earlier in this presentation about how we're going to -- you should see our brands advertise more, you should see more innovation coming from us and you should be hearing about us. We're becoming a much more relevant company, not just to the retail customers and the end consumers, but globally. Each business unit has its own brand -- had its own brand and channel strategies, but there are many things that each of them can do to support and execute those strategies, and we haven't been able to do that historically, consistently well in each business. And so to jump-start that and reinforce innovation in each business unit, we've created and launched a brand-new team of over 100 persons. This is legacy -- yes, it's legacy tower, but it's also supplemented with different industry expertise, outside hires. And they're performing functions for each of these businesses to really pursue higher top line growth. And that's really where we're driving the business to. Unfortunately, we did kind of plow into the thing called COVID-19, but we entered it in a very, very strong position. With that, why don't I turn it back to Nik. I think I've taken up enough bandwidth and let's get to some fireside chat questions.

Great. Thanks, David. I appreciate it. And thanks for that comprehensive overview. I guess the first thing I wanted to kick off with is, the March quarter was strong. I mean I think virtually anyone that saw that result was a bit surprised to the upside. But I think the real significance of the quarter was not necessarily what you delivered, but the fact that you delivered what you said you're going to deliver in the December quarter, despite all the turmoil from COVID. So can you just talk about that to get us started? What do you think really attributed -- or contributed to your ability to deliver despite all the chaos we saw in March?

Yes. Look, on one hand, I'm super jazzed about the March quarter. But quite frankly, that's -- we actually are doing what we thought we'd be doing because of global productivity improvement. I think, back in late January, we reported Q1, we discussed kind of the plans to resume sales growth for the March quarter. We did deliver on that commitment. Obviously, the top line growth in the second quarter was great. Over 4% organic growth is healthy. But it's important to note that's -- that was also driven by sales growth throughout the quarter. So to your point, we saw growth in March even after COVID was impacting us. In total, we estimate COVID-19 negatively hit us by about $7.5 million of revenue in the second quarter. And in addition to delivering kind of the sales growth commitment, the Q2 accomplishments, I think, demonstrate the importance of strong and consistent execution, which is what we're really striving for, to restore this company to a healthy multiple. I've been disappointed in our total enterprise to EBITDA trading value. And we believe that by putting up strong consistent numbers over multiple quarters is the best way to get that multiple expansion, to create quite a bit of wealth for our stakeholders going forward. Yes, in the quarter, we grew EBITDA by 21.5%. We improved the margins of EBITDA by 230 basis points to 21.1%. That's a good margin on EBITDA. The balance sheet perspective, we did have -- I did pull a few levers here in response to COVID-19. We did increase the amount of cash on hand meaningfully. And we drew down the revolver. We did end the quarter with $458 million of cash in our checking account. Since the end of the quarter, we did add another $90 million of tranche to the revolving facility that remains undrawn. I don't think we'll ever draw it, to be honest, but it was just an insurance policy. And obviously, since the end of the quarter, we've generated a lot more cash. So our cash balance is meaningfully higher today. We also continue to execute on little things. We continue to prune the portfolio. We sold the European dog and cat food manufacturing assets for just over $30 million. We closed the inefficient Cambodia rawhide facility. And then we did a tuck-in acquisition with a Omega Sea to add to the Pet Care portfolio in our Aquatics business. But yes, Q2, look, I'm pleased with it. Strong, consistent execution. And quite frankly, we were really teed up to kind of drive it out of the park this year. COVID, it initially has a demand shock and then it's got a supply shock. And -- so we've got to navigate those waters. But we're -- the company is in good shape.

Excellent. Jeremy, maybe I can kick it over to you. Obviously, you just reported about a month ago, but this environment a lot concerns. But can you just quickly touch on how COVID has impacted April and more broadly in fiscal 2Q, retail total discussed?

Sure, Nik, happy to give you some color there. I mean, one, first and foremost, while you're very quickly watching what's happening to the business, you're focused more importantly on employees and safety. I would say, we continue to be really pleased that, we've had an extraordinarily low number of cases, as it relates to our total population around the world through a lot of hard work, through our COVID-19 impact team, led by our CHRO. We did withdraw guidance, as you know, and you saw -- and that's really just around uncertainty, both in demand and supply, right? And that's kind of an unprecedented situation to be in. But as we've gone through the quarter, what we've experienced, I would say, is continued strong demand in Pet and Home & Garden, David referenced earlier, and I think most people expected. If you look at HHI, we indicated on the Q2 call that we were experiencing some disruption in the new home portion of that business. As you know, that represents about 25% of the business. That seems to be turning back on. As you saw last week, I think, for a lot of homebuilders, some good numbers, some good mortgage numbers coming out today, mortgage applications. And then I would say, building on David's comments earlier, we've been pleasantly surprised with the demand strength across the HPC categories and portfolio of products, both in the kitchen as well as grooming. And then on the supply front, it's a bit of an update. We do continue to ramp up deliveries here in the U.S. and in Europe from our Chinese supply chain, in the appliance business. And pleased to say that, all of our factories are back up and running at HHI, ramping up employees and production as each week progresses. So we do continue to expect, if things continue as they are now, with no additional massive waves of shutdown that we would catch-up from a supply disruption perspective by the end of our fiscal year.

Excellent. David, maybe over to you, just on e-commerce. Obviously, big spikes in e-commerce engagement and sales. So maybe just talk about your capabilities, like how do you rank them? And discuss some of the near-term opportunities. How big do you think this business can be couple of years down the line?

Yes. Look, you're right, the pandemic has clearly accelerated our fastest-growing channel in the second quarter...

I think we might have lost David.

Yes. I think we did. Nik, I'll pick up for David.

Yes. Sure.

Until he's able to dial back in, if that's okay.

One team, one dream, right?

Yes. That's exactly right. So yes, I mean, fascinating developments, as a lot of consumer product companies have seen. Q2 e-commerce grew for us by over 38%, which was really interesting. May be just 1 second, Nik.

You bet.

Last year, e-commerce grew for us by about 15% and made up about 10% of our sales. But we do expect stickiness in the channel here on e-commerce. And fortunately, through a lot of hard work over the last couple of years, adding capabilities and not only Comm Ops but overall digital platforms. We have a data analytics team that sits in Austin and they've been doing great. So we've created a lot of content. We partnered well with the retail customers. And you'll see there's a ton of new content out there online about -- across all of our product categories as we try to help our end consumers prosper at home. So it's really been a nice thing to see for us.

Excellent. I don't know, if we have David back, but if he wanted to touch on e-commerce at all. Okay. I guess, he doesn't. Jeremy, maybe just -- we got a couple of minutes here. You touched quickly on supply chain. But can you just give us an update? You obviously, you guys are talking about disruptions in the Philippines and Mexico, china was obviously off-line and it has come back pretty strongly. So I just want to make sure that we have a full picture in terms of where we are in the supply chain side?

Yes, absolutely, Nik. So I gave you the kind of details on HHI, and that's a great thing, obviously, a little more color on HPC. I would say, I think we indicated on the Q2 call that based on our expectations of demand, we expected to catch up by the end of Q3. As I mentioned a little bit earlier, I think demand has been stronger than we expected across many categories. And so now I think that's probably more into Q4 that we catch up in the HPC business, but still a very positive thing. I think to add some color in Home & Garden, we have our plants back up and running. We've only had minimal disruptions, though we aren't operating at full capacity as we've implemented measures that we need to in the plants from a social distancing perspective. But the reality is the season has been strong, thus far, weather has held up nicely, particularly, in the south and southeast. And for the most part, we've been able to fill demand and get, as I said earlier, I think more than our fair share of category sales in this important part of the season. But I think in Pet, we had more minimal disruptions from an Asian supply chain perspective, and we haven't had anything that's materially impacted sales. We've been really pleased with the continued demand. I think as you know, and we've talked about before, a lot of shelters, particularly in the U.S., most dogs have been adopted. So we've got a lot of new consumers in the category, and our brand strength is bringing those consumers to us. And then, this interesting phenomenon that David mentioned earlier that I think has surprised many of us, myself included, around a lot of people moving to the aquatics channel, now that they're spending more time at home. And so we have seen good demand for tanks and have ramped up production in our Indiana facility to support it. So overall, we're really pleased with where we're at, but certainly not without challenges.

Yes. Excellent. And just last question here. We've got 2 minutes left. And this could be either for you or David, if he was able to get back on the line, but -- recession, right? Recession is something that people worry about. Your portfolio is viewed to be discretionary. But I think you proved that it was a lot more defensive than, I think, anyone anticipated. So how do you guys think about managing your business in what looks like an inevitable downturn?

Yes, it's interesting. I mean, one, I think your point there is really important, Nik, that, I think, our products, our categories, our businesses are a lot less discretionary than many thought. And I think that's actually quite logical, as you look at them. Pet and Home & Garden, David's comments earlier are spot on. People will continue to take care of their pets. Many people move to do-it-yourself as it relates to Home & Garden, as it relates to our product categories in HHI versus higher-end service providers in recessionary environments. And so we think we're a lot more durable than people expected, and we're confident in that. At the same time, we'll watch demand closely. We'll adjust cost as we need to. If we see demand disruption for a continued period of time, we'll be responsible. We're already putting in some controls around spend and capital. And as David also mentioned earlier, we have a lot of liquidity. We have nearly $700 million of liquidity between cash and availability. Markets -- debt markets remain open to credit, such as ours. And many of our peer companies have been quite successful in the market here over the last couple of weeks. And while we don't expect to need it, we're pleased to see that. And then we'll be very careful about working capital. And as you know, from following the company, we're in the middle of our fiscal year, typically about our peak in working capital investment. And during the second half of the year, we're a strong cash generator, and we don't see that being any different this year. So we expect to build liquidity as the year goes. And then as a reminder, we hold over 4 million shares of Energizer, which is a liquidity lever to pull, if we ever needed it.

Excellent. Well, we're at time. Jeremy, David, hopefully, you're back on, but I thank both of you for taking the time with us today, and thank you for being part of this conference. And good luck with the rest of the meetings today. And stay safe and healthy. Thanks, everyone, for joining us.

Thanks, Nik, for having us, and apologies for technical difficulties.

That's okay. It's the world we live in these days, right?

It is. It is. Take care.

All right. Take care. Bye.

Thanks, everybody. Bye.