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

Good morning, everyone. I'm Nik Modi, RBC's HPC Beverage Packaged Food and Tobacco analyst. And today, I'm pleased to welcome Spectrum Brands and joined by Chairman and CEO, David Maura; CFO, Jeremy Smeltser; and VP of Investor Relations, Kevin Kim. Spectrum Brands is coming off several exceptionally strong quarters, beating expectations across segments. Dave, Jeremy, and Kevin, thank you so much for taking the time today.

Thank you. Thanks for having us.

Thanks for having us, Nik.

Yes.

So Dave, maybe we could just start with you just as a high-level overview on the most recent quarter and just talk about organic growth coming in much better than expected in basically every segment. What happened in the quarter that was a real surprise to you relative to your expectations?

Look, I think -- look, real credit to the team. I think everybody has really embraced kind of Galileo, they've embraced the investments back into the business we've been making. And I think we've really got everybody kind of -- the culture is much better. I think people really know that they're on a winning team again, and they're playing for keeps. So I mean, look, the second quarter, yes, that we just finished, organic sales grew about 18%. We did have double-digit growth across every one of our business units. And listen, I think if you're asking for us, yes, I think demand continues to outpace supply. We continue to try to get our fill rates up, and we've made further progress on that since the last quarter. And we continue to deal with supply chain issues and freight and some inflation now. If you keep in mind that the first half of 2021, our organic sales grew 22.6%. Look, this visibility going forward, gave us confidence last quarter to kind of raise our earnings framework for the year from kind of a high single-digit growth into the mid-teens. And look, we're fortunate. We're exposed to a lot of great growing categories. And like I said, over the last 3 years, we've been very intentional about investing in some additional capabilities and resources to kind of drive our business forward faster than our competition. And so look, we've got a very robust product road map. We continue to make investments in R&D. We've doubled our advertising promotional investments since 2019. And we're looking to continue to grow above category rates across all the business units. So we feel good. We feel -- we're going to continue to fuel the front end of the company with product innovation and brand investments that resonate with our consumers. So that's really the -- that's the playbook right now.

Excellent. Maybe we could just talk about the consumer since you ended the last answer there. I mean there's a lot of moving parts, especially here in the U.S. with COVID and stimulus. But vaccinations have also accelerated, and we seem to be advancing into the new normal now. So what behaviors are you expecting to change or stick in the short to long term? What have you been witnessing in the past few weeks as we hit some of these mobility milestones? And then what do you expect from having this in terms of other markets abroad, in terms of some of your international markets?

Yes. Look, I think I've been on the phone with a number of economists, and I'm trying to figure out the future like the rest of us, but I think, look, the consumer in the United States right now is sitting on approximately $2.5 trillion of liquidity, which is an astronomical amount of cash. If you try to buy a house right now or car, used car pricing, I mean you're seeing inflation. And so that's just a reality. I think that if you look at this housing bill and this infrastructure bill that the government – the administration is trying to get through right now, it's not a direct shot into the vein of the economy, but it's definitely a big drip. And so I think -- look, I think kind of my viewpoint is GDP is going to have a pretty good run here, I think, for the next couple of years. My concern would be on the rate side. But look, people tell me that the Fed is going to continue to support things here. And it sounds like the German bund is definitely negative still. The Japanese seem to like buying our treasuries above 1.6%, 1.7%. So look, as long as rates don't get out of hand, we continue to have this very strong macro housing market. There's a lot here. I think, look, your point in the U.S., COVID stimulus, vaccines have accelerated. Look, we are definitely moving into, I think, a new normal, as you say. I think it's bifurcated. The south, some parts of this country, never really shut down more than a month or 2, and they're kind of wide open. I think you still have a staging of opening in the Northeast and the West. So you can see those patterns change across our markets. But look, we're a home essentials business. We're on a mission to make living better at home. All 4 of our business units center in and around the house. Strong demand for our products remain. Like I've mentioned, at the start of my comments to this question, the housing market is very hot. HHI and Home & Garden benefit there. We've got record pet adoption rate, which is super supportive for our global pet care unit. And we see more regular use of our products, particularly home appliances and personal care. So I think for us, for me, what I'm hoping to prove over the next 6 to 9 months is that this company didn't just benefit from COVID tailwinds, but it's actually taken market share, consumer behavior and categories that we're in and the duration of people's commitment to housing, to pets is of a longer duration, sticky nature. And we can show that the earnings power of this company is not only bigger than people think it is, but it's more sustainable. And that, I think, will be where people can value the company to hire multiple of earnings and drive our stock price. So look favorable macro conditions, stimulus spending, shift to suburban home, humanization of pets, all these things create elevated demand for the products that we make and sell, and we believe they're sticky and behaviors are shifting, coming our way to the home environment.

Yes. And one thing I'd like to remind investors about Spectrum Brands is, you guys benefit from what I call the COVID echo, right? It's that obviously, you're benefiting now. But a lot of the investments consumers are making in their homes, like buying a new home, haven't even happened yet or haven't been formed yet, which then creates a larger installed base. So I think it's important for folks to realize it's not just benefiting today, but it's also a tale of benefit that will come in the next year to 2 years.

No. Look, Nik, to your point, I mean, I was recently at a construction site. And I was -- I didn't mean it, but I said, "Hey, when can I get a home here?" And I looked at it, this large -- very large parts of the land. And she's like, "that's all sold." And I'm like, "what do you mean?" And she said, "Well, I could offer you something over here and there were still pine trees here like, but the waiting list is 1.5 years, 2 years." And so look, I do. I think there's tremendous pent-up demand. It's -- the household formation is there. We just -- we've got to increase supply halts. And it's coming, but it takes time, but that's great because they're all buying my Kwikset product. And so that's kind of my backlog as I look out over the next 24 months. But I'm sorry to interrupt.

No, that's great. Thank you for that perspective. So during the pandemic, we heard a lot from retailers about how they're adding shelf space to certain categories, extending certain seasonal business selling item time frames, we're incorporating a different mix of categories into holiday. Some of this has certainly benefited the company in pet, home, garden appliances. Do you think this is a sticky move going forward? And just as you've been working on your retail relationship, how has that evolved in the categories over the past couple of years?

Yes. Look, I think Jeremy can comment on it later on, too. But I mean our retail relationships -- our relationship with our retail customer is night and day. I mean, the relationships we have now are tremendous. They're deep. They're partnership-oriented. That just wasn't the case a few years ago. And so look, I think the point of your question is accurate. I think our retail consumers realize that people are not going to 100% go back to the office environment. There's probably going to be a hybrid model going forward where people are coming in 2 or 3 days a week. But home is going to remain kind of the core, the hub. And people want to -- if they're going to spend all that time at home, they want to take care of their animals. They want to play in the yard. They want to have nice hardware on the doors, and they want to do home remodeling projects. And so I think there is some rules, to your point, stickiness, permanence here. And yes, I've seen with my own eyes both the online and brick-and-mortar stores, they've adjusted their footprints to reflect these kind of mega trends. And these adjustments are quite frankly, helping traffic and driving inventory positions and they focus on a very healthy assortment of products that we sell to enhance that consumer -- their end consumers' experience. So look, the teams are going to remain very disciplined with increased investment in data analytics, focused on driving productivity remains core, and we see increased velocity. And trying to drive share performance across the board. We're investing in brand equity, and then we're trying to optimize the planograms. But yes, I do see a shift, and I think we are getting a bigger piece of the pie.

Now David, not only did -- obviously, your relationship with retail has improved, but you've also done pretty well with data and analytics and really bringing new consumers into your portfolio. So how do you think about that going forward? I mean new pet parents, new homeowners, like, is there an opportunity for Spectrum Brands to just kind of increase kind of share of wallet within the home?

Look, absolutely. And I think, again, that's going to be my -- I was talking with an investor earlier today. I mean, my main priority, our focus is, we want to show the world that we can paddle through this inflation and do quite fine over the next 6 to 9 months. We want to demonstrate the durability and earnings power of our company, and we want to show we can grow in the future. And so that's where I think our -- yes, it's nice to see our share prices reacted a little bit to the fundamentals we've been able to deliver. But I think as we can demonstrate over the next couple of quarters and year that we're really – we've -- over the last 3 years to hit the core of your question, we have invested tremendous amount of money in our commercial operations on really 4 big pillars, consumer insights, analytics. And that's really finding out what the customer wants where the hockey puck is going in the next year, 2 years, 36 months. And then we use that to inform our innovation and our new product development. We have a new digital consumer experience that we've invested in. We've invested tremendous amounts of capital resources, and we upgraded a lot of talent in e-commerce. Our e-commerce is doing exceptionally well as a result of that. And we have new resources of revenue and profit management capabilities that we've deployed from basically a shared model to those -- to all 4 of our operating units. So look, the commercial operation, I think that investment over the last 2 to 3 years is going to help us outperform the competition, take market share and continue this growth post the COVID environment. But also, you have millennials, you have Gen Zs and these consumers are growing an influence. And they're clearly shifting to a suburban type of a home environment. They want to prioritize their quality of life, sustainability. They like raising pets. They like the humanization of pets, pet ownership, they like that experience. They're adopting to enjoying greater home square footage inside of the house. These are very favorable trends when it comes to the end markets for a company like ours, for Spectrum Brands.

Yes. Yes, this whole notion of suburbanization, I mean it's amazing. For about 2 decades, all we talked about was urbanization. And now we're seeing a reverse of that, which I think is fascinating and that's driven by millennials and Gen Z, like you said. Maybe switching to Jeremy and just wanted to kind of go on inflation. You recently raised the forecast for inflation headwinds this year, not unlike everyone else in the space. Can you tell us today what are some of the areas that you're seeing the most impact from? And how do you expect this to kind of manifest? Is this transitory? Is it structural? Any thoughts around that would be helpful, Jeremy.

Sure. Yes. Thanks, Nik. You're right. We raised it, right? Everybody has been experiencing the last 6 months, continued increases in inflation. I'd say it feels a little more stable the last 45 days than it did 3 or 4 months prior to that. Total for us, about $120 million to $130 million should hit the P&L this year, predominantly the second half, very little hit P&L in the first half. We started to experience it in our Q2 but most of it was capitalized on the balance sheet in inventory. So that tells you that on a full run rate basis, it would be quite a bit higher than that. 55% to 60% of that is purely ocean freight for us. So in that particular situation, everybody in the industry is experiencing it. Our retail customers are experiencing it in their own supply chains. We value -- to the conversation you and David were having, we value those retail customer partnerships greatly, right? And so we're very transparent with what we're experiencing. We try to partner with them on how to recover as much of that as we can and not impact the consumer and not impact POS where possible. So we put in a lot of freight surcharges. And to your question on transitory, not transitory, it feels to me that the ocean freight inflation that we've seen is beyond logical. It was really due to constraints that were probably temporary. They take a while, but temporary. So I think as you get through, hopefully, Lunar New Year next year, we start to see some declines in that ocean freight. I mean it's not what you typically see where container rates triple or quadruple over a 90-day period, right? So -- but the rest of the inflation, 1/4 of our inflation is materials, one way or another, so it could be through our sourced products, and we understand what's in those bills of materials. So think resins in HPC, think metals in shaver blades and toasters in all of the HHI products, likely to be -- thinking about all the macro comments that David made, likely to be less transitory and more sustained in my mind.