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

Okay. So next up this afternoon, I'm pleased to welcome Spectrum Brands' CFO, Jeremy Smeltser. Over the past year, Spectrum has been busy at work simplifying its portfolio, deleveraging the balance sheet and reinvesting productivity savings to accelerate longer-term growth, all while still managing COVID-19-related supply chain disruptions. I'm going to pass it over to Jeremy to go through some prepared remarks, and then we'll move to a Q&A session that I'll host. So Jeremy, thanks again, and here you go.

Thanks, Lauren. Thanks for the introduction. I appreciate that. Thanks to you and Barclays for the invitation to this conference and for hosting. To everybody out there, I would ask you to please take a minute to study our forward-looking statements and reconciliations to non-GAAP financial measures in the next couple of slides. These are also posted on our website. So you can read them at your leisure as well and then also find the appendix slides with those reconciliations when you have a moment. So starting with content here on Slide 4. In today's environment, the Spectrum Brands family has come together to serve our retail customers, our consumers and our communities around the globe better than ever before. We're embracing our new identity as a true home essentials company. We're innovating marketing and bringing joy and happiness to our consumers worldwide. Whether it's in the kitchen, the yard, around the house or with pets, all of our products are focused on making life better and more enjoyable for consumers of our products and services throughout the world. So at this point, Spectrum is just under $4 billion in annual revenue with market-leading positions across 4 broad categories and business units that I'll talk about in more detail in a bit. If we could, Kevin, go to Slide 5. So look, we think we're positioned really well for the long term. The actions of our Spectrum Brands family this year reflect a lot of resilience [ and certainly ] excellence in this ever-evolving and crazy environment that we're all experiencing. First of all, we had to focus on our employees. So a lot of safety protocols in response to COVID-19. We have employees in DCs and manufacturing facilities and out in our retail brick-and-mortar customers. So the primary focus has been there. We've been very pleased with that. We've been challenged as everybody has. Many of you know, we had temporary factory shutdowns mandated by governments at Mexico and the Philippines. And as you'd expect, we've had our own experiences in our plants domestically and Europe as well. But the reality is that we've experienced all of our products really do revolve and center around the home and our consumers' experiences in their home. So we've quickly pivoted to have that messaging to create content, to share content with our consumers and try to place ourselves in the best position we can to meet the demands that are out there. Fortunately, we've had our global productivity improvement plan in place. It's benefiting each of our businesses. As many of you know, we've talked about continuously, we expect to generate at least $100 million of full run rate cost savings over the next 9 to 12 months. Savings across procurement initiatives and operating model improvements are driving real benefits, helping us to offset some of the headwinds that we've had as well as supporting investments and incremental investments in advertising that we're making this year. From a balance sheet perspective, we're always focused on liquidity and a strong balance sheet. At the end of June, we strategically refinanced our existing $890 million cash flow revolver with a new 5-year $600 million revolver and $300 million of 10-year senior unsecured notes due in 2030. So leverage-neutral transaction allowed us to maintain our strong liquidity, while extending our maturity profile and favorable pricing. If we flip to the next page on 6. We're really proud of the whole team at Spectrum. When the COVID disruption started, a lot of companies began or were forced to pull back, but we remain very focused on not only our consumers, but also on our retail customers. And as demand continues and at the urging of our Board of Directors; and David Maura, our CEO and Chairman, we developed 9 new brand campaigns in record time and got approval to spend an incremental about $20 million telling the Spectrum Brands home essentials company story. We'll spend around 1/2 of that in the second half of this fiscal year and the rest going into fiscal '21 for us. The campaigns are focused in HPC around George Foreman Smokeless Grill that we've just launched, Black & Decker, Russell Hobbs [ in Europe ] from a kitchen appliance perspective and Remington and mostly will be funded in the fall aimed at a strong holiday season that we typically experience. In the GPC business, our pet care business, it's really focused on where we have our strength already treats and chews from a consumables perspective and then a hard goods focus on FURminator aimed at awareness and driving conversion to our brands. In HHI, it's really around our SmartKey technology as well as Microban for Kwikset, which kills germs on the metal for do-it-yourself security and healthy homes as well as our Pfister Ladera line for telling the do-it-yourself story in partnership with our retail customers. And in Home & Garden, the 2 major focuses for these brand campaigns are in Cutter, protect your people, both from the insect -- personal insect repellent, but also from our new hand sanitizer perspective as well as Spectracide You Hold the Power, promoting healthy living and do-it-yourself opportunities. So if we could, a quick run through the businesses here, starting on Slide 7. Our Hardware & Home Improvement unit represents a unique collection of home improvement segments with leading brands, really good market penetration and multi-channel distribution. As many of you know, again, we experienced some shutdowns and supply disruptions around Mexico and the Philippines and others, which negatively impacted our results, particularly in our fiscal third quarter. However, as we've talked about in the past, we believe that, that situation is largely resolved. We are back up and running at very good rates, and we expect supply to be caught up by around the middle of our fiscal first quarter. If you look at the product categories, security is the largest segment. We hold the #1 position in U.S. residential locks with our Kwikset brand. We're #1 in Canada with the Weiser brand and have the largest luxury lockset with Baldwin as well. The strength of this segment, very much based on a broad product offering at each major price point from opening to high-end, the foundation of our patented SmartKey technology, which if you're not familiar, it allows you as a consumer or a property manager to rekey your own lock to any Kwikset key in about 15 seconds. So no need for calling a locksmith, the expense, the time, et cetera. We have a vertically integrated supply chain, strong product innovation pipeline that's led to a really large installed base and a growing share also in the area of home automation. In plumbing, we have the #3 U.S. brand in Pfister, where we leverage strong industrial design talent to produce popular new designs at consumer-relevant pricing. While we do quite well in traditional retail box stores, our current strategic focus is aimed at the wholesale and builder channels, where we're gaining share, especially in the growing multifamily segment. Our ability to combine security and plumbing together creates a unique offering to builders. Earlier this year, we signed the largest new contract in the Spectrum Brands history of Pfister, combining Kwikset and Pfister with Clayton Homes, one of the top homebuilders in the U.S., for exclusive security and plumbing for their prefab division for the next several years, significant incremental revenue for both brands starting this year. If we could move on to Slide 8. Sorry, I'm flipping back and forth between 2 screens here as we've all gotten used to. So this is our second largest unit, our Home & Personal Care business. It's our most globally diverse business with the U.S. representing about 40% of revenue, a very strong position in EMEA. Additionally, somewhat unique by competing with market-leading share in both the Home Appliance segment as well as Personal Care. Year-to-date financial results reflect strong growth in the U.S., Canada and Asia Pacific and continued growth in Europe based on the broad-based turnaround momentum of our HPC business behind a new management team, globally aligned strategies and increased investments. Our George Foreman brand is the clear market leader in the indoor grilling segment worldwide, and our new Smokeless George Foreman Grill is getting great reviews. Our Black & Decker brand has been the U.S. market leader in fast-growing toaster ovens for several years, and we're excited about further gains here as we lead with the expansion of features, including air fry technology integrated into the toaster oven. We also have the leading U.S. position here in garment care with the retail sweet spot for price and performance in irons. Now that momentum is shifting rapidly into handheld steamers, driven by the rapid adoption by millennial consumers. And in the U.K., Russell Hobbs is the market leader in kitchen and home appliances and continues to expand share. And finally, probably the most well-known brand in here, Remington is a market leader around the globe in many hair appliance categories. With Remington, we're leveraging the hair appliance leadership to focus on growth in men's styling, the launch of our new Graphite Series of products connected with our global partnership with the Manchester United Football Club is generating double-digit growth across Europe and Australasia, and we'll be launching soon in Latin America and the United States. If we could flip to Slide 9, Kevin. So a quick overview of our Global Pet Care unit. This business, as you've seen in our financial results, is the furthest along in our transformation journey. This unit has delivered now, I think, 7 consecutive quarters of revenue growth and 5 consecutive quarters of EBITDA growth, really strong growth here in the last quarter, in particular, you can see year-to-date, up about 7% on the net sales line and 21% from an adjusted EBITDA perspective. We're focused on global market leadership positions in our core categories of Aquatics, Dog Chews, Pet Grooming and Pet Stain & Odor. In addition to the already strong fundamentals of the category, we're especially encouraged by all the new pet parents who have recently entered the companion animal category and all the new hobbyists who have recently entered into the aquatics and reptile categories as we've all been working from home in the pandemic. These are long-term commitments and bode well for the future demand of our consumables products. And as we look forward, our new product pipeline remains strong, both from our perspective as well as that of our retail partners. If we could, Kevin, let's flip to Slide 10. And finally, Home & Garden, this is our smallest unit at approximately $500 million in annual revenue, but we continue to be excited about the potential here. It's highly profitable, with high barriers to entry, and we see strategic opportunities shift from a value player to a category leader as we are willing to invest longer term in innovation and consumer engagement. After a slow start in the first quarter, our financial results have improved sequentially in Q2 and Q3. And given the stay-at-home situation we are in, we expect growth to continue into an extended selling season in Q4. Primary areas where we compete would be outdoor controls, indoor insecticides and area and personal repellents. We have the #1 position in this combined market at an estimated 27% share, which has steadily grown over the past 6 years. We are led by Spectracide from a growth perspective, which was the only brand in the top 7 that grew last year in the U.S. Our largest brands all delivered strong performance this last quarter as consumers spent more time at home, and we experienced favorable weather patterns. So finally, Kevin, if you flip to 11. In conclusion of the prepared remarks here, we believe our portfolio of leading brands, our focus on innovation and our improved execution with this management team will generate long-term growth and consistent results over time. We believe our future is bright with strong demand outlook, balance sheet's in good shape, we're operating strongly, certainly to weather this storm, but into the long term. With that, I'll turn it back to Lauren.

Great. I'm just starting my video. Let's see if I come back. Obviously. Here I am. Okay. Good. Thank you, Jeremy. A lot of change that you've already worked through. So -- but I wanted to start with the near-term questions because a lot of that covered longer term with good reasons. But on the last call, I think you mentioned that COVID-19 supply chain disruptions negatively impacted sales by about $100 million in sales and then EBITDA by about $30 million. Could you just provide us an update on how Spectrum would be able to recover from that?

Sure, Lauren, thanks. And what we said is specifically on the supply chain disruptions is $100 million and $30 million of EBITDA. And that's an important distinction. We've been getting a lot today in our meetings, a lot of questions around that. Well, what about increased costs in operations? And what about savings from lack of T&E, et cetera? We try to -- and I'll say, a lot of questions on how much demand, particularly in Q3, where our organic growth was so strong with the exception of HHI, how much of that is pandemic-driven and could be a tough comp last year? And my response to that is a lot of those things are difficult to track, and so we really wanted to focus on the supply chain disruptions and the numbers that we provided. The good news is, as we said on the Q3 call, we continue to be on track. So we're operating in all of our factories. For the most part, we're operating at higher than pre-pandemic levels. So we're starting to catch up to those supply chain disruptions from a customer inventory perspective. We'll catch up with that first, and then we'll start rebuilding our own safety stock. But likely, as I said earlier, that's going to take us well into the fourth quarter of the calendar year, our first fiscal quarter.

Okay. Okay. Great. And then if I move into productivity. Also on the last call, you'd reiterated expectations to generate at least $100 million of run rate cost savings. Can you just give us a little bit more granularity on where these savings are coming from? And sort of what we should expect going forward in terms of incremental opportunity?

Sure. Yes. So I think as we look to the first 3 waves of savings, those were primarily sourcing-related savings, particularly in our product supply chain areas. Right now, we're working on the wave 4, which is really around logistics and indirect spend. So really, we're not leaving any stones unturned with this new process that we're using around really reducing costs and keeping quality high at the same time. So as you look at the $100 million, those 4 waves of sourcing will probably cover 2/3 and 3/4 of it. The remainder comes in a lot of back-office and G&A-related changes that we're going through, such as outsourcing some of our transactional functioning -- functions as well. And then over time, we're making significant investments in IT-related capabilities. We're not seeing a lot of savings from those yet, but we will in the outer periods over the next couple of years, and at that point in time, we would expect that we would be able to raise the $100 million. We're not quite there yet, but as we've told investors all the time, our goal is higher and as we're able to deliver that, we'll communicate it. As you look at our EBITDA performance year-to-date and think about how that compares to last year, which is relatively flat ballpark, as I said earlier, the reality is some of those savings are going to offset some of the incremental tariffs that we've experienced over the last couple of years, which for those of you who haven't followed us closely, that's around $120 million growth as compared to fiscal '18 when we didn't have any tariffs. And then as I said also earlier, our advertising spend is ramping up. It started in Q3. Year-over-year, I would expect we'll probably spend about $15 million more in fiscal '20 than we did in fiscal '19 on the advertising line, and we're funding that through some of these GPIP savings.

Okay. And just to continue on the IT systems piece of it, I guess, anything more on the work -- on the actual IT systems that enables this new operating model, this kind of new ways of working?

Sure. Yes. There's -- I'll tell you, when I walked in the door 11 months ago, and I run finance accounting and IT here, I walked in the door, I was amazed at the number of large projects that were in process. So the good news is a lot of those projects -- this is before we get to ERP to back up a bit, a lot of those projects have wrapped up or are launching now. And I would say the biggest investment and risks are behind us. Those are things like revenue, profit management software, which a lot of CPG companies use, and we have done it pretty manually in the past. So we implemented those tools. We have them up and running in North America across most of the business and over the next couple of years, we'll expand that globally. So really excited about that. Commonly referred to as a trade and profit management system or TPM system. We've got a new sourcing tool that we've brought in, a tool or product called Coupa, which essentially all of our spend will go through that tool as well as it has competitive data that help make sure that we're positioned as best as we possibly can. We -- as you'd imagine, in the pandemic, we've updated our VPN hardware, we've updated our security. Thankful to say that we were quick. A lot of it was in progress before I got here, and we've operated very seamlessly from home, which has been a great thing. And now we're in the early stages of an SAP blueprint design. We're going to really move the whole business to one integrated ERP system globally, and we'll do that on the S/4HANA platform out of SAP. So those are in the very early stages. That's going to be a 3- to maybe 4-year journey before we implement across the whole company, depending upon how active we are in mergers and acquisitions over that period of time. So it's a lot of fun. It's a very exciting time for us. Frankly, we were underinvested for a number of years at Spectrum. We were more focused, I think on -- more focused on M&A, ran a more decentralized model than what we do today. And so those system upgrades and standardization wasn't really necessary. But our model now is really an operating company and to run that from the core with our business units focused really on just product to consumer. And we're trying to centralize our center-led -- or center lead, I should say, everything else in the business to enable them to focus on consumer and products. So that's kind of the mandate that I had when I came in the door, and we're well on our way.

That's great.

Probably more, if anybody wants to hear about IT systems except for me on this call, but I like it.

No, but we have a number of companies right in this group who have made that -- need to make that shift from sort of a holding company or conglomeration of businesses into an operating company. So there's precedent of that conversation. Let's just shift to top line, maybe. If you could just talk a little bit, thoughts around organic growth expectations kind of into '21 and beyond would be great.

Sure. Yes. Look, I think like a lot of companies, we're still trying to analyze what's happened in fiscal '20 as it relates to demand, POS, supply chain disruptions. So specificity right now around our growth expectations for next year with pending second wave, et cetera, is challenging from my chair. What I would tell you is that what we're trying to accomplish through our playbook. Our playbook is relatively simple, and it's a playbook that is consistent across all 4 businesses and all of Spectrum Brands, which is focused on investments in consumer insights, feed that into really talented engineering and R&D groups to develop the best products that we can that match what the consumers are looking for, put money behind the brands and partner with our retail customers, whether they be brick-and-mortar, e-com or combination thereof to push those brands to consumers. And that's the mix. I mean that's the game that we're playing. And we think, especially given the lack of strong organic growth the last couple of years that we're positioned to deliver above category growth as we execute that well by 1 to 2 points. I mean, that's really the goal. We think it's a realistic goal to take share in the 1 to 2 point range above category growth. And our categories are growing anywhere from 1% to 5% with the pet area probably being the higher-growth areas.