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spk02: Good morning, ladies and gentlemen, and welcome to the first quarter 2021 Spectrum Brands Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Kevin Kim. Thank you. Please go ahead.
spk03: Great. Thank you so much, Jerome. I'm Kevin Kim, Divisional Vice President of Investor Relations and moderator for today's call. To help you follow our comments, we've placed a slide presentation on the event calendar page in the investor relations section of our website at www.spectrumbrands.com. This document will remain there following our call. Starting with slide two of the presentation, our call will be led by David Mora, Chairman and CEO, Jeremy Smeltzer, Chief Financial Officer, and Randy Lewis, our Chief Operating Officer. After their opening remarks, we will conduct the Q&A. Turning to slides three and four, our comments today include forward-looking statements, which are based upon management's current expectations, projections, and assumptions, and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 5th, 2021, and 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, we will discuss certain non-GAAP financial measures on this call. Reconciliations 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. And now, let me turn the call over to David Moore.
spk01: Well, thank you, Kevin, and good morning, everyone. We appreciate you joining us this morning. Before I get started today, I want to take a moment to speak directly to our employees and our partners around the world. Thank you. I want to thank you for your commitment to our company. You have embraced both our global productivity improvement program and the spirit of our servant leadership culture. You have persevered through a global pandemic to deliver excellent financial performance for our stakeholders. Because of you, the new Spectrum Brands is emerging now as a more efficient, focused, productive, and consistent operating company. We are a company on the move again, and it's all because of your hard work that's now beginning to pay off. So again, I thank you. We can now turn to slide six, our financial results for the first quarter. reflected another quarter of exceptional top-line growth and operating leverage, with adjusted EBITDA doubling to $204 million. This growth was a combination of delivering on strong demand for our products as a home essentials company and restocking of retailer inventory levels. More importantly, our first quarter performance reflected yet another quarter for our long-term stakeholders. Additionally, during the quarter, we repurchased $42.3 million worth of Spectrum brand shares, and by the end of January, we sold our remaining Energizer shares, which further strengthens our balance sheet and adds to our liquidity position. Our first quarter sales growth of 31% reflected growth across all business units. with another quarter of strong POS and improved supply chain performance. As discussed on our prior earnings call, all of our businesses continued to benefit from supply chain recovery, particularly in our hardware and home improvement business, which was a big contributor to this quarter's results, with sales up 37%, or $111 million. We achieved double-digit growth across all business units and our e-commerce sales growth was over 54% this quarter. If I turn your attention to the bottom line, Q1 adjusted EBITDA doubled, which reflects productivity improvements across all business units from our global productivity improvement program and favorable mix, as well as our supply chain continuing to drive output and improve our service levels. As we outlined during our last earnings call, Our reinvestment continues to reignite the flywheel of new product launches and improve our top line organic growth rate. It is expanding our margins and it is driving greater profitability and cash flow generation throughout our company. If I could turn your attention now to slide seven. During the first quarter and now into the second quarter, like many CPG companies, We have started to experience transportation and commodity-related inflation significantly higher than our original expectations for the year. And at this point in time, we estimate the impact of this at approximately $70 to $80 million for our full year. But it's a rapidly changing environment, particularly for ocean freight. However, despite these headwinds, our strong start to the year and continued strong POS give us confidence in raising our earnings framework to reflect high single-digit net sales and adjusted EBITDA growth. And as we said at the start of the year, we still expect that growth to be front-half weighted. If I can move you to slide eight now. As I said last quarter, we believe we are better positioned today than we have ever been to drive demand as a home essential company, with customers needing and desiring our brands and products more than ever. Our first quarter performance reflects another quarter of wins, and we expect to continue winning in the future as the flywheel of investing in consumer insights, innovation, marketing propels our brands and products to new heights. we will continue to focus on execution of our winning playbook, leveraging our strong manufacturing and distribution footprints. On slide nine, going forward, our capital allocation priorities will continue to focus on one, allocating capital internally to our highest return opportunities, and this includes strengthening our brands through consumer insights, research development, new innovation, new product launches, and advertising and marketing, all to drive vitality and profitable organic growth. Two, we will continue to plan to return cash to our shareholders via both dividends and opportunistic share repurchases. And third, we will remain disciplined on the M&A front with tucked-in strategic acquisitions that are both synergistic and help drive significant value creation. This includes our focus on our target leverage ratio in the three to four times range. You're going to hear more now from Jeremy on the financials, and Randy will give you a more in-depth update on the additional business unit insights. So let me turn the call over to Jeremy at this time.
spk07: Thanks, David. Good morning, everyone. I'll turn to slide 11 for a view of Q1 results from continuing operations, beginning with net sales. Net sales increased 31.4%. including the impact of $11.3 million of favorable foreign exchange and acquisition sales of $20.3 million, organic net sales increased 27.8%, with growth across all four business units. Gross profit increased $153.2 million, and gross margin of 36.9% increased 600 basis points, driven by higher volumes in all business units, improved productivity from our global productivity improvement program, and favorable mix. SG&A expense of $258.7 million increased 14.2% at 22.6% of net sales, with the dollar increase driven by improved volumes as well as higher advertising and marketing investments. Operating income of $123.5 million was driven by improved volumes and profit margins and lower restructuring spending. Net income and diluted earnings per share were primarily driven by the operating income growth. Adjusted diluted EPS improved to $2.13, driven by favorable volumes, improved productivity, and positive product mix. As David said, adjusted EBITDA doubled from the prior year, driven by growth across all four business units. Turning now to slide 12, Q1 interest expense from continuing operations of $36.7 million increased $1.9 million. Cash taxes during the quarter of $8.2 million were $6.3 million lower than last year. Depreciation and amortization for continuing operations of $35.7 million was $6 million lower than the prior year. Separately, share and incentive-based compensation decreased from $14.5 million last year to $8.1 million, driven by the change in incentive compensation payout methodology we discussed last quarter. Cash payments for transactions were $12.1 million up from $4.6 million last year. Restructuring and related payments for Q1 were $11 million versus $38.6 million last year. Moving to the balance sheet, we had a cash balance of $224.5 million and approximately $585 million available on our $600 million cash flow revolver at the end of the quarter. Total debt outstanding was approximately $2.5 billion, consisting of approximately $2.4 billion of senior unsecured notes and approximately $162 million of finance leases and other obligations. Additionally, net leverage was approximately 3.4 times compared to our net leverage target range of three to four times. During the quarter, we repurchased 600,000 shares of our stock for $42.3 million. Also, we sold 1.4 million shares of Energizer stock for proceeds of $60.5 million and held just under 300,000 shares at quarter end. Since the quarter closed, we sold off our remaining Energizer shares. Capital expenditures were $11.8 million in Q1 versus $18.7 million last year. Turning to slide 13 and our earnings framework for 2021, We now expect high single digit net sales growth in 2021 with foreign exchange expected to have a slightly positive impact based on current rates. We continue to expect growth to be first half weighted. Adjusted EBITDA is also expected to grow high single digits. This includes benefits from our global productivity improvement program, approximately 11 months of results from the recent Armitage transaction, which last year generated about $80 million in revenue. and incremental net tariff headwinds of about 25 to 30 million dollars, driven by the expiration of previously disclosed retrospective tariff exclusions in 2020 and our higher volumes. In addition, as David mentioned, we have also now factored in an additional 70 to 80 million dollars of cost inflation. Fiscal 2021 adjusted free cash flow for continuing operations is still expected to be between 250 and 270 million dollars. and inventory levels. Depreciation and amortization is now expected to be between $180 and $190 million, including stock-based compensation of approximately $30 to $35 million. Full-year interest expense is expected to be between $140 and $145 million, including approximately $6 million in non-cash items. Restructuring and transaction-related cash spending is now expected to be between $60 and $70 million. Capital expenditures are expected to be between $85 and $95 million. Cash taxes are expected to be between $35 and $40 million, and we do not anticipate being a significant U.S. federal cash taxpayer during fiscal 2021 as we continue to use net operating loss carry-forwards. For adjusted EPS, we use a tax rate of 25%, including state taxes. Regarding our capital allocation strategy, we continue to target our net leverage range of three to four times adjusted EBITDA. As it relates to our 2021 earnings framework, please keep in mind a few additional factors. First, we are planning for incremental advertising investments of approximately $20 million in fiscal 2021. As we continue to raise awareness, consideration and purchase intent. Second, recall that Q1 results this year included the benefit of six additional selling days due to previously outlined changes in our fiscal calendar. This has a converse impact in Q4 2021 with six less days. It's important to recognize this modeling nuance results in a natural deceleration of growth in Q2 2021 compared to the prior year. Third, the inflationary pressures we expect And fourth, adjusted EBITDA is also expected to be negatively impacted by the absence of Energizer dividend income. Now I'll turn it over to Randy for a more detailed look at our operations.
spk06: Thanks, Jeremy, and thank you all for joining us today. I'm obviously very excited to provide my comments today, and I'll focus on the review of each business unit to provide detail on the underlying performance drivers. I will also update you on the current overall cost environment and touch on our global productivity improvement program. So overall, we continue to see significant benefits from our operating model transformation, as well as the addition of significant new talent in key strategic roles. Additionally, in Q1, all four businesses saw improved supply chain performance and resulting higher service levels. These factors helped drive double-digit sales growth in each business, and our productivity gains and operating leverage led to record growth in adjusted EBITDA. Now let's dive into the specifics for each business. Starting with hardware and home improvement on slide 15, the first quarter reported net sales increased 37.3%, and organic net sales increased 36.8%. This sequential improvement was driven by continued strength in POS, and improved supply, which allowed us to fulfill the majority of our previously disclosed open backorders. Net sales grew substantially across security, plumbing, and builders' hardware categories. Adjusted EBITDA increased 129.4%, primarily driven by the positive volumes, productivity improvements, and favorable mix, partially offset by COVID-19-related costs and higher marketing investments. This represented another strong quarter of sales growth resulting from our manufacturing and supply chain teams elevating production well above the pre-COVID rates. While retailer inventory and open orders returned to more normal levels, we expect sales in Q2 and beyond to moderate from the large 19% and 37% growth rates over the most recent quarters to something more in line with regular POS levels. We also expect a natural moderation of margins from a more normalized product mix going forward, as well as increasing cost pressures. Additionally, recall the significant tariff exclusion benefit in Q2 of last year, which represents a net headwind in Q2 of this year. Going forward, we continue to expect demand in 2021 to benefit from our new product introductions, incremental advertising investments, and enhanced promotional activities. This includes the continued benefit from incremental plumbing and security orders from Clayton Homes, a top builder of manufactured modular and site-built homes in the U.S. Fundamentals across both the repair and remodel and new build channels continue strong, and our incremental advertising dollars for our Kwikset and Pfister brands are continuing to add to POS gains. Our starting line focuses on Microbond, which incorporates antimicrobial technology into product coatings, smart key technology, which allows users to rekey their own locks to any QuickSet key in about 15 seconds. And we remain very excited about our Halo Touch product, a biometric and Wi-Fi-enabled smart lock with voice assistant capability through Alexa and Google Assistant. Now to home and personal care, which is slide 16. Q1 financial performance, seasonally the most important quarter of the year for HPC, reflected a strong holiday season. Reported and organic net sales increased 17.5% and 15.8% respectively. Adjusted EBITDA increased 39.8% to $50.9 million. Net sales was driven by strong growth in both small appliances and personal care, as well as growth across all regions. This includes the return to growth of our Latin American region, which was particularly hard hit by COVID-19. From a subcategory perspective, growth was driven by continued strength from home cooking products as well as a return to growth in hair care products. EBITDA was driven by higher volumes, productivity improvements, favorable pricing programs, and mix, partially offset by increased marketing investments. Q1 represented the sixth consecutive quarter of year-over-year top-line growth, exceeding last year's strong holiday selling season. Strong sales momentum has continued from that holiday season into the second quarter with growing demand for our home essential products. Additionally, we believe incremental demand in the U.S. is also benefiting from recent stimulus spending. While fill rates have improved, our supply chain teams remain focused on service levels given the heightened demand. New product introductions in this category from the Remington brand with Wet to Style in the Americas and Hydrolux in Europe are driving hair appliance category growth again. and teams continue to seize growth opportunities across cooking, food prep, and breakfast preparation. We see strong growth from air-fried toaster ovens from the Black & Decker brand, and our investments in the George Foreman smokeless grill continue to pay strong dividends. Our focus in 2021 will remain on consumer-led, insights-driven products and continuing to incrementally invest in our brands and hero ranges across more markets than ever before. Moving to global pet care, which is slide 17, Q1 represented another strong quarter of financial performance with reported net and organic sales growth of 33.9% and 21.9% respectively, and adjusted EBITDA grew 70.2%. Top line growth was driven by both the aquatics and companion animal categories, as well as growth in all regions. Higher EBITDA was driven by volume growth and productivity improvements partially offset by higher advertisement and marketing investments. Q1 was also the ninth consecutive quarter of year-over-year growth on the top line and seventh consecutive quarter of bottom line growth. In addition to this consistent performance, our global pet care team continues to build its worldwide market leadership position in the core categories of aquatics, dog shoes, pet grooming, and pet stain and odor. Recall that we added Armitage Pet Care to our portfolio a few months ago, and this acquisition is creating an excellent platform for continued international expansion of our fast-growing chews business, as Armitage is well-established in the UK grocery channel and offers an attractive assortment of not only dog, but also cat chews, treats, and toys. Our global pet care team remains confident that 2021 and beyond will benefit from the continued execution of our global growth strategies coupled with the strong category growth fundamentals, particularly the sustained demand for consumables, given all the new pet parents and companion animal and all the new hobbyists who have recently entered the aquatics and reptile categories. These are long-term commitments and bode well for the future demand of our products. And finally, home and garden, which is slide 18. First quarter reported net sales increased 79.3%. and adjusted EBITDA increased $13.7 million from a loss in the prior year. The top line grew across controls, household insecticides, and repellents, driven by strong POS, as well as early orders across mass distributor and online channels stocking up for the spring season. The EBITDA increase was driven by significant volume growth, favorable mix, and productivity improvements, despite headwinds from COVID-19-related costs. The second quarter should also benefit from strong retail orders heading into the prime selling season. While weather and POS performance in our peak season remain unknown, we are positioned very well to maximize results given our increased production capabilities and our customers' early inventory build. We will also further increase our investment in advertising and consumer engagement in this business, as well as launch meaningful consumer-led innovation in the second quarter. We plan to continue to invest more advertising dollars to tell our story around the brands of Spectracide, Cutter, Hotshot, and Ecologic, along with incremental research dollars to deliver even more new and innovative products. We believe these actions will further enhance our vision to be the recognized leader in providing consumers the best solutions to conquer nature's challenges and enjoy life. This is only possible with the continued focus on our distinctive combination of brands plus formulations and registrations supported by efficient manufacturing and strong customer relations. The fundamentals in this business remain strong with solid profitability and high barriers to entry. We are confident that our strong brand equities and increased investments in product development and marketing will accelerate our long-term growth rates. Now let's turn to our internal growth and efficiency efforts with our global productivity improvement program turning to slide 19. We continue to be laser-focused on execution as Q1 delivered productivity improvements across all business units. We also remain resolute on using these savings to reinvest back into the businesses to deliver long-term sustainable organic growth. This program continues to be our most important strategic initiative as we transform into the new spectrum brands. Also wanted to address the recent changes in input costs and overall inflation. At this point, these pressures are expected to be higher than we originally planned for the year by about $70 to $80 million, driven primarily by freight and other material cost inflation. We are addressing these headwinds with a coordinated and consistent strategy based upon our initiatives developed through our GPIP program. We are working in concert with our supplier partners to offset this inflation and have many additional mitigation actions that are being executed in each of the businesses. Pricing will be included in these actions to the degree required, and we believe our leadership position and recent brand investments are positive backdrops to those conversations. As Jeremy alluded to earlier, these headwinds are currently included in our earnings framework for the year, and we will remain diligent in our operating discipline to minimize the impacts. This quarter, also, e-commerce grew by more than 54% and represented more than 16% of overall net sales. Additionally, our digital teams continue to leverage data for the early identification of consumer trends of new product and sales opportunities and create promotional content that appeals to those consumers. In summary, to end my section, I want to acknowledge a sensational quarter of progress on our operating culture and strategic initiatives across SPB and to thank our 12,000-plus employees for all they are doing to make us a better, faster, and stronger Spectrum Brands. This includes all that they are doing to deal with the pandemic conditions, which we greatly appreciate. Now back to David.
spk01: Thanks, Randy, Jeremy, and thank you, everyone, for joining us today. Given that we've covered quite a lot on the call, let's conclude with the key takeaways on slide 21. First, our Q1 financial results reflected exceptional top-line growth and operating leverage. Adjusted EBITDA doubled to $204 million, and our performance demonstrated another quarter of consistent execution for our long-term stakeholders. Second, we continue to prioritize a strong balance sheet and strong liquidity, and we continue to target net leverage in the range of three to four times, and we've maintained over $800 million of total liquidity. Third, Our year-to-date performance in the businesses give us the confidence to raise our net sales and EBITDA earnings framework to high single-digit growth compared to fiscal 2020. We believe we are well positioned financially and operationally to continue to grow. We will continue to be laser-focused on our employees, our consumers, our retail partners, and our shareholders. It is extremely gratifying to me. and the team to be able to deliver these exceptional results given all the hard work to transform our operating model and to invest for future growth. Spectrum Brands is back, and I am extremely proud of our team, and I'm excited about our future. I want to again thank all of our employees, from our frontline workers in the factories and distribution centers to the many other teams around the globe that have been working from home. I'm eternally grateful for all the sacrifices you've made to navigate our company successfully through these challenging times of the past 12 months. Thank you for your time. Thank you for your continued support. I'd like to turn the call back over to Kevin so we can take any questions you may have. Great. Thank you, David. Jerome, let's jump right into Q&A.
spk02: Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Olivia Tong from Bank of America. You may now ask your question.
spk08: Great. Thanks. Good morning. Congrats on a great quarter. I wanted to get a little bit more color on the key drivers of the sales beat, whether it's and it probably changes depending on the division, but how much is from better underlying category growth versus the initiatives that you've made to gain market share, not needing as much promotion, maybe the innovation hitting better than you had expected, catch-up not taking as long as you expected. If you could just walk through some of those things so we can think about how customer reviews have changed in your categories or for your brands, that would be helpful. Thank you.
spk01: Hey, Olivia, thanks so much. Good morning to you. Appreciate the question. Look, first and foremost, I think this quarter is really just the culmination of a lot of hard work that's been done behind the scenes over the last two going on three years. We have really repositioned the operating model of this company to listen very carefully to consumers. We have completely rearranged the innovation environment the R&D functions to be consumer insight driven. We are launching products that our customers and our end consumers want. Every business unit is taking market share now. So we are outperforming category growth. And we are marketing. We are telling our story to the consumer. We are demonstrating to them that not only are we a home essential company, not only are we making it uh, better and more fun to live your life in and around your home and in your yard and with your pet, et cetera. Um, but we're creating products that consumers now desire and the company has moved from a push model to a pull model. And, um, I'm just extraordinarily, uh, grateful, uh, for all the efforts of all our employees to make this happen. But, uh, That's what I'll say about it. I'll flip it over to Randy if he wants to give you any additional color. But we're doing things in a very sustainable manner, I would tell you. We really are reinvesting. We are not, you know, even now with additional cost inflation, the temptation is to, boy, do we really want to continue to make these additional dollars in advertising and marketing? And I can tell you affirmatively we will lean into that. We are a company on the move again. And we are very much interested in having long-term sustainable growth organically. So, let's hope that addresses at least some of your questions.
spk06: Randy Manion Good morning, Olivier. Hey, it's Randy. Just a little bit additional color on that. We would say maybe a third of the increase was catch-up across the business units on the supply chain performance, and that was more heavily weighted in our HHI business where We think we're pretty healthy with regards to the current VAC law. There's a little bit of additional catch-up opportunity in Q2, but for the most part, we're there. But then outside of that, there was also a little bit of benefit in home and garden from the standpoint of just the optimism around the potential category for the year, and a lot of retailers are leaning it ahead of time. but the balance of the growth was spread across to all the businesses. And as David said, we believe that we're in a good share growing position in most all of our categories in all of our businesses. And so we're seeing it's category by category, but as you heard in my comments, and we've seen the return to growth in Latin America in HPC, we've seen return to growth for hair care products, which has been really hard hit for most of the pandemic. And so The strength of the category is solid across almost all our businesses.
spk08: Great. That's super helpful. And you sound super optimistic about a couple of different areas within your portfolio. So just wanted to get your view on your current portfolio and how all the pieces go together because you obviously know at one point in time you had planned to part ways with a portion of your portfolio, then shelve that plan. So if you could just talk through the portfolio makeup and how you're thinking about it, that would be great. Thank you.
spk06: Well, I mean, the beauty, Olivia, of the new operating model that we've transformed to over the last 24 months is that we've got a front end that supports really well most consumer products, even durables and consumables. And so the model works well. And so we were able to evaluate the assets based upon their growth potentials. And across the board, I mean, It's different factors, but we saw substantial growth in housing starts in December, far exceeding what we were expecting, and so that housing market continues to be strong. Repair and remodel categories that follow that continue to be very strong, and so we like the fundamentals in that business. We think there's a lot of opportunity for us to grow our plumbing business as we shift and focus more on wholesale. And we're seeing great results from the many new lines and new aesthetics we're bringing into that category. In appliances, you know, it's been a long turnaround, but it's really there right now. And so that team is just hitting on all cylinders and really starting to leverage from the globalization of the strategy. We're seeing all of those brands perform extremely well. We've got great relationships in our retail spaces that we didn't necessarily have 24 months ago, and so that one's, again, very comfortable. PET is just, you know, it's been the darling for us for many, a couple years, many quarters now, but there's still runway there. As an example, our Nature's Miracle brand and our top Choose brands in the U.S. are just now starting to launch into the European theater, and we're using... The Armitage acquisition is leveraged to accelerate that. So there's a lot of runway remaining. And the most amazing thing in Pat for me for the last three quarters has been the growth in aquatics. And this is a growth not only in consumables, but these are large tanks. Our manufacturing facility has been going all out on 55-, 60-, and 75-gallon tanks since early summer. And so people are making – substantial commitments to this space which lead into long-term consumables revenue streams for us. And then home and garden, the transformation there is a little longer in timeline because of the product registration process. And so many of the things that we're really excited about there on products are still ahead of us, but the transformation just as far as the attitude and the leadership are taking hold and our retailers are really starting to see us differently in that space. So I'm really happy with the portfolio right now. That's my view.
spk08: Got it. Are there areas where you think it might make sense to quickly get bigger, like via an acquisition? And on the flip side, are there areas where you may consider digesting to either simplify the portfolio or fund growth in other areas of the portfolio?
spk01: Look, I think right now, right, I mean, we've kind of achieved escape velocity You know, from operating improvement metric standpoint, I think all businesses are performing very well, and I think our outlook is confident. You know, look, we've been buying back shares. We bought a lot of shares this quarter, you know, despite our shares starting to recognize the hard work that's been done. Under the hood, I think our stock price is still cheap and has a lot of upside to it. We're thrilled we've got some new investors in this year. We are exceedingly grateful to some of our larger stakeholders like Fidelity for giving us the time to turn the business around and now demonstrate significant improved earnings profile. Look, I think we continue to be laser-focused on deleveraging the balance sheet, getting the top-line sales growing faster, and obviously expanding margin now as we get operating leverage throughout the businesses. Look, where things make sense strategically, if there's some opportunity to create a ton of value for stakeholders, we're open to that. I consider this team to be... pretty self-aware, but we've worked really hard and made a lot of sacrifices to get to where we are today. I think right now it's continue to execute, continue to deliver consistent results, continue to pay down debt, continue to get organic growth, foster the competition, take market share. If something comes up and it creates a lot of value for our stakeholders, we're wide open. That's how we look at the world.
spk02: Your next question comes from the line of Nick Modi from RBC Capital Markets. He's going to ask your question.
spk10: Yes, thank you. Good morning, everyone. So I wanted to just quickly clarify what Randy said. Did I hear it right that you guys are now caught up at retail? It just seems like this is a moving target because demand for the category has been so strong. So I just wanted to make sure I got that right.
spk01: And then... Nick, let's just stop there. So, look, we caught up a lot in the last quarter. We're still chasing demand, okay? Let's be clear about it. We are still working our tails off to get our service levels up. POS remains exceedingly strong across the businesses, and we believe we are now taking share in all four business units. So, again, that's the – that's the bedrock that gives us the confidence to tell you that we're comfortable with our framework being raised to high, you know, single-digit growth, despite, you know, a number of, you know, you know, external, you know, negative externalities, you know, mainly, you know, freight and inflation. So, yeah, let's be clear. We worked really, really hard on the supply chain side. That's why you hear me complimenting our employee base repeatedly today. It is unbelievable that the challenges that they have, you know, met and then exceeded time and time again. So grateful to everybody, you know, with our logistics, our sourcing networks, our production facilities. But, no, we haven't filled at all, and we're continuing to restock, even in this quarter, some additional inventory service levels and working very hard to be laser-focused on servicing our customers with excellence and getting those fill rates even higher. So still work to do and still chasing demand. I cut you off. You had more to your question.
spk10: Yeah, no, no. It was just kind of the bigger picture question was, On M&A, David, is there any, you know, perspective you can give us in terms of what you're seeing in the marketplace? You know, do valuations look better today than they did, you know, a year and a half ago? I just wanted to get your sense of the landscape.
spk01: Yeah, I mean, Nick, you know me well. You know, I spent my first 10 years at Spectrum. Really, that was my main focus was kind of M&A. We built the CPG powerhouse, and I was very gratified with it, you know, all the way through 2017. Obviously, you know, I took it very personally, you know, the disappointment that the company faced in 2018, and I've made it a, you know, the number one goal of mine professionally was to change the culture of the company, give it vision and direction and purpose and clarity, and really get the buy-in from the essentially you to me, and really empower all the different operating companies. And, you know, look, you know, we built this, and, you know, shout out to Tim Goff. I mean, you know, we built out this comm ops group, which is really collaborative across all the four business functions, and it's just doing a tremendous job with us trying to listen, you know, to our customers and, of our product launches. And I think that's the greatest thing we've done is just transform the culture of the company, and now the numbers are starting to follow suit. In terms of the M&A market, look, I think that, you know, while our operating performance is now starting to really show through, I think, you know, compared to private sector multiples, public company multiples, I think our companies remain undervalued. I think we're very attractive for investors to enter even now. I think our shares have a lot of room to run. I think that there's still a tremendous amount of liquidity in the world. Private equity is sitting on a ton of fresh powder. The SPAC market has exploded. And so there's just a lot of people chasing assets. So I would tell you that from my old M&A days, I kind of see the world long a lot of liquidity. but short assets, and they need operating assets that perform to fill the investment demands out there. And that continues to solidify my view that Spectrum remains a very attractive equity to take an ownership position in our company because I think we have a lot of upside. On the M&A front, you know, I think, you know, big strategic stuff remains, in my book, expensive. But where we can do, you know, tuck-in acquisitions that are highly creative and strategic in nature and build our franchise, I think we're wide open there. You know, I'm sure people on the call want to ask me about rumors in the marketplace. We're just not going to comment on them. But, you know, if there's opportunities to create greater value with – With other things down the road, again, we're a self-aware team that want to create a ton of value for stakeholders. So we'll see what the future holds. I hope that is enough color.
spk02: Your next question comes from the line of Bob Lovick from CJS Securities. He may now ask a question.
spk05: Thank you. Good morning. Congratulations on really fine results, particularly the record margins. Great stuff. I just wanted to clarify your guidance because obviously the implication is for EBITDA declines for the balance of the year. You talked about the incremental $70 to $80 million of inflationary headwinds. I'm assuming that's since mid-November. And the question is, does that reflect any mitigation on your part? Is that a net number or is that the total number? And then you expect to mitigate it somewhat, but you're leaving that to be upside from the guidance. I'm trying to wrap my head around those moving parts.
spk07: Sure, yeah, Bob. So I would say that really kind of mid-December, we started to see the signs, particularly on the inbound ocean freight side. Things really accelerated in January. Obviously, there's been lots of articles documenting this well. The 70 to 80 is really... kind of the gross inflation that we see as compared to our original expectations for the year. We have a little bit of mitigation built into the updated earnings framework. But admittedly, we've been somewhat cautious on that because a lot of that work is still ahead of us. And obviously, we're using spot rates for the most part, current spot rates on inbound, which is a big spend for us. obviously there's some level of potential variability in that as well, but we're just trying to be really transparent with what we put in the numbers.
spk05: Okay, great. That's helpful. And then kind of my, you know, bigger picture question is, you know, obviously with COVID and supply chains and everything else, the growth rates have moved around. You gave us some good color to understand it a little bit, but I was hoping you could take a step back and just give us a sense of your thoughts around the underlying growth characteristics by segments and once volatility subsides, what we should be thinking about over the next, you know, three to five years, again, forgetting the short-term volatility around it?
spk01: That was such a good question. I'm going to give it to Randy. Good morning, Bob. Good morning.
spk06: You know, I think it varies a lot by business unit and also by the category and the region. But, again, I think, you know, we would anticipate – in the appliance segment, the kind of normalization, attenuation, with some level of overall increase as lifestyles change. In the hardware area, you know, just the general people investing in homes and driving the technology, we still continue to feel like that is going to be a good grower for us. And PET's probably the one that, you know, again, as I mentioned, there's a lot of activity through this COVID pandemic that has long-term implications on the consumables portion of that business. And then in home and garden, from a category perspective, we continue to see it as a great place to be, you know, more moderate growth, but we expect a lot of new entrants into the category. There's been an awful lot of people moving not only out of the cities and into the suburbs, but also moving from the north to the south. So we're seeing millions of people moving into our more target areas as far as product and region, and so we would anticipate that to continue to grow faster than what it has over the last several years.
spk01: That's a good point.
spk06: I hope that helps, Bob.
spk05: Got it. No, that's great. I appreciate it. I'll get back in queue. Thank you.
spk02: Your next question comes from the line of Chris Carey from Wells Fargo Securities. Humano, ask your question.
spk04: Hi, good morning. Hey, Chris. Good morning. Good morning. Can you just comment maybe on what you're seeing so far in the calendar year to date? I mean, housing data looks good. Garden trends, I know it's, you know, we're in the seasonally slower period, but we are starting to get to the period where retailers are going to be stocking up inventory, as you noted. Pet ownership increased during the pandemic. The channel battle looks good. I appreciate it's smaller for Spectrum, but certainly there's some momentum there. And so, you know, I'm trying to frame that trend seemed pretty good, you know, this quarter to date as well. and maybe just get a feel for how you're seeing things. And, you know, specifically, you know, that means the back half remains the swing factor here. And I wonder if, you know, over the past couple months, your visibility into what you can do in the back half of the year has improved. Obviously, you've raised the guidance today. So really just this concept of what you're seeing, you know, year to date and whether you've got any, you know, improved visibility into the back half trends.
spk01: You sound like me on our weekly calls. I'm always asking all the different teams and business units that question. I'm always asking them, do you see a pullback yet? Are things subsiding? Is demand reverting to the mean? To be honest, we're still chasing demand across the board. I think there's times where I have thoughts about the vaccine gets rolled out and everybody wants to go back to life as normal their home and go to the south of France and have a good time. But look, I think the more we experience the journey we're on and we see what's going on in terms of people's day-to-day lives, I think there's real permanence to wanting to live in a more renovated, better home. I think You know, I'm not trying to be negative, but, I mean, this is one pandemic. Will there be one in the future? Another one. I mean, I think people are just valuing home and home-based activities, and I don't think everyone's going to go back to work all of a sudden. I think commercial real estate is probably a tough place to be for a long time. I don't think everyone's going to go back to the office, even when you can go back to the office in cities like New York, et cetera. So... Um, you know, I think this whole enjoy your yard, you know, cook at home, um, you know, get your house in immaculate shape with remodel work yourself or, or, you know, as Randy's talking about, which we, you know, I, you know, I, it was a very good comment. I mean, you see a lot of, a lot of movement, um, in, in household formation around this country that, that is really beneficial to us as a, as a, you know, a remodeler and a renovator and, um, playing with your pets. And, uh, it's, Look, we'll tell you when we see it, but right now, you know, things look good on the demand front. Randy, you want to, Jeremy, comment?
spk07: Yeah, I mean, you know, we certainly got more confidence in the back half of the year than we had 90 days ago based on PLS continuing, you know, I think to the first part of your question, strong here so far in the calendar year. half, because to David's point, we don't know exactly how things are going to moderate. I think it's interesting as we kind of watch each and every CPG company report and talk about the level of uncertainty that they have, but I think it's not an inconsequential raise to our net sales and our earnings framework from 3% to 5% up to high single digits. I think that's appropriate for now, and we'll see how things progress over the next 90 days.
spk04: Okay, very helpful. And then just the follow-up here is I think the 70-80, that was a gross number for the incremental transportation and commodity inflation cost. But you also said, I believe, that there were potential mitigation actions you could take, whether that is pricing. You know, potentially there's some other incremental cost saves that you could unlock in the business. realize it's still early days because this really accelerated December, but can you just give us a flavor of the sorts of actions that you might be able to take and potentially frame the amount of this incremental inflation that you might be able to offset if successful? Thanks.
spk01: Yeah, look, I appreciate what you said there because it is fast and sudden and recent. And so, you know, we're still getting our head around it because, you know, mid-December and Now, there's not a lot of time in between there. I think, look, we've said pretty clearly we're working with our suppliers to mitigate this. You know, we don't... Raising prices is kind of the last thing we want to do, but I think it'll probably be necessary, you know, given what we're seeing. And again, we don't want to get over our skis, and we don't want you to get over your skis with the outlook. So I think we want to We want to deal with what we're seeing in front of us. We want to be very transparent with you, our investment community. But at the same time, the top line looks really good. We're getting a lot of operating leverage in the business. I'll pass it to Randy if he has any further color he wants to give you.
spk06: Yeah, Chris, I was just going to say, I don't think we're going to start talking about the numbers of the mitigation or the offsets. There are lots of activities that are ongoing all the time as far as cost improvement programs and continuation of our our GPIP benefits. But, you know, it is a material amount of costs that are coming at us. And, you know, we're just going to have to wait and see, as David said, you know, how successful we can be in mitigating some of that.
spk04: Okay. Thanks very much. Thanks, Chris. Thank you. Thanks, Chris.
spk02: Your next question comes from the line of Zainzal Ali with VoiceBack. He's going to ask a question.
spk00: Yes, hi, good morning, and congratulations from me, too, on a really, really good quarter. So I just wanted to dig a little bit deeper on HHI, and the first question was I was wondering if you could talk about how POS has trended in that quarter, just given the volatility in the quarterly results, and we don't really have access to a lot of the POS data. So I know you've talked about strong POS. But I'm wondering if you could, you know, either directionally quantify it or talk about the trend that you've been seeing over the last, you know, call it a year or so.
spk06: Morning, Faisal. This is Randy. I would say, you know, over the last year, it's been just a crazy roller coaster. And so what we're trying to do is to look at the last 90 to 120 days when supply has become more consistent and predictable. And what we've seen is is a very nice correlation to POS continuing to grow as inventories at retail continue to get healthier. Some of our strongest POS in that business unit has occurred just in this calendar year, in the last five weeks. It's really hard for us to get a read on the underlying details of what's causing everything, but again, we've had substantial new product launches. We've had new resets in two of our top retail partners. We're getting much better product in those set mixes. And, again, we're supporting it with more advertising and promotion and promotional spends with some of our best retail partners. And so it's all of those things combined that's driving the POS gain. And just to give you some sense – security and plumbing both up very nicely in January into the mid-20s.
spk00: Okay, that's super helpful. And then just on the GPIP and the tariff, I was wondering if you could talk about where you are on the – I know you've talked about $150 million run rate savings on the GPIP program. I don't think you mentioned sort of where you are at this point in time and sort of how much is left. And then similar thing on tariffs where you talked about, I think it was $25 to $30 million of incremental tariffs. And I think there's a 2Q headwind. Could you talk about how much is left just to help us, you know, model the rest of the year?
spk06: Yeah, so on the tariffs, we're – We have most of that still ahead of us for the year, given the comp issue for us. So the majority of that is going to happen. It'll start happening in Q2, but majority in Q2, Q3. And with regards to the GPIP program, I think we've said we'll be pretty close to run rate by the end of the year, but we haven't been given mid-year updates. But it's It's not too far off of a linear program for this year.
spk00: Got it. Perfect. Thank you so much.
spk02: And your next question comes from the line at Ian Zafino from Oppenheimer. You may now ask your question.
spk09: Great. Thank you very much. Great to see e-commerce growing super fast here. Can you maybe give us an idea of Where you're seeing that growth, is it more on the specialty channel? Is it more on just the general e-retailing level? And then as you look forward, what sort of mix should we expect e-commerce to become as part of the company's overall sales? Thanks.
spk07: Yeah, I mean, I think in e-com specifically, we're seeing the growth across all e-com channels. So, you know, not just dedicated e-com, but also e-commerce. as brick and mortar has gone online as well. So the good news there is that, you know, we're a little bit agnostic to which particular channel that goes to. As you know, over the past couple of years in particular, we've gotten away from having, you know, really specialized to certain channels. So that's been good for us. You know, I think last year for the full calendar year, we were about 16%. I think total sales were e-coms. relatively consistent here in the first quarter. It actually grew as the year progressed last year. Total percentage, I think, difficult to tell, but I think a business like ours, we could certainly see moving across the portfolio to a quarter over the coming couple of years, but it's a little bit different by business. Home and Garden, for example, while it's growing there, that's a type of product a lot of people want immediate gratification. They'll go to the store and buy it and use it. in all four of them on the e-com.
spk09: Okay. And then just, Gabe, when you talked about tuck-ins and acquisitions, what type of dollar amount are we thinking here? You know, is there a top on what you would actually invest in a tuck-in? You know, just kind of ballpark. And I know you don't have a crystal ball, but any kind of color you could give would be great. Thanks.
spk01: Yeah, look, I think... Again, we're striving very, very hard here to really excel in the operations across all four lines of our business and our company. And, you know, that is the number one allocation of capital is due to internal returns. We also believe that, like I said earlier this year, base levels based on where I see valuations elsewhere. And so, you know, we've heard from our investor base and we're listening that, you know, leverage is important to them. It's important to us. And, you know, March of 2020 and the pandemic and the financial market reaction to that is still fresh in our minds. And so strong balance sheets, strong liquidity is still of paramount importance to us. Look, if there's great tuck-in acquisitions, I'd definitely like to do something home and garden. You know, we've been looking pretty hard on the hardware side. You know, the pet space, obviously we've been successful there. I just think, you know, continuation of that, which are, you know, you've got to do the same amount of diligence, whether it's a $2 million EBITDA business or a $50 million EBITDA business. But, yeah, I wouldn't want to give a range on the size of a deal. It's just... you know, if the valuation's right, if we can tuck it in and, you know, effectively, you know, double the EBITDA in the first 24 months of on it, really bring down that purchase multiple and then, you know, strengthen the franchise from a strategic standpoint, you know, we're wide open to deploying that capital. But, again, I think we want to continue to just deliver consistent excellent operating performance for our stakeholders and to continue to reward our shareholders right now with a lot of organic growth. That's our focus.
spk02: Perfect. Thanks for the call.
spk01: Thank you, sir.
spk02: Thank you. And that concludes our question and answer period. I would now like to turn the conference back to the company for any closing remarks.
spk07: Thanks, everybody, for joining us today. We appreciate it. Kevin and I will be available today and Monday as well to answer any further questions. Have a great day. Thanks, everyone.
spk02: Ladies and gentlemen, this concludes this conference. Thank you for your participation, and have a wonderful day. You may all disconnect.
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