Spectrum Brands Holdings, Inc.

Good day and thank you for standing by. Welcome to the Spectrum Brands Holding, Inc. second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Cecil Kotter. Please go ahead.

Thank you. Good morning and welcome to Spectrum Brands Holdings Q2 2023 Earnings Conference Call and Webcast. I'm Cecil Kotter, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we've placed a slide presentation on the event calendar page in the investor relations sections 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, our Chairman and Chief Executive Officer, and Jeremy Smeltzer, Chief Financial Officer. After opening remarks, we will conduct the Q&A. Turning to slide three and four, our comments today include forward-looking statements 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 May 12, 2023, our most recent SEC filings, and Spectrum Brands Holdings' most recent annual reports on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement. Also, please note that we will discuss certain non-GAAP financial measures in this call. Reconciliation on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website in the investor relations section. Now I'll turn the call over to David Mora. Over to you, David.

Hey, thank you, Faisal. Good morning, everyone. Thank you for joining us today for our second quarter earnings update. We appreciate everyone attending. I'll begin with an update of the company's strategic initiatives, followed by an overview of the operating environment. Jeremy, as usual, will then provide a more detailed financial and operational update, including a discussion of the specific business unit results. If I could get everyone to move to slide six. Let me first start with a very positive achievement on the strategic front. As many of you know, and you've already learned from our press release last week, we've agreed to a stipulation with the Department of Justice to settle their challenge of ASSA Abloy's $4.3 billion acquisition of our hardware and home improvement segment. We remain confident that the transaction will close on or before June 30, 2023. We are particularly pleased that our hardware asset and employees are going to such a great home in Assa Abloy. I have not only the utmost respect for them as a company, but their culture is excellent. They are a high-performance business with impeccable character. I am confident that our employees and brands will flourish in Assa's hands as they take HHI to the next level operationally. This is the most significant strategic pivot likely in the history of Spectrum Brands, as the receipt of the HHI sale proceeds will materially strengthen our balance sheet, enhance our capital allocation strategy, and in fact will make us a net debt-free company. This transaction will also bring us closer to our long-term goal of becoming a faster-growing, higher-margin, pure-play global pet care and home and garden company. This will also allow the team to devote all of our resources to and to prioritize the long-term growth of the remaining businesses. We remain committed to finding a strategic and organic way to enhance the value of our home and personal care business. As we have previously communicated, we will use the proceeds from this transaction to delever and to strengthen our balance sheet. We will start that process by paying off the term loan and the revolver facility immediately following the close of the HHI sale. We also plan to return cash to our shareholders through share repurchases. Our long-term leverage target remains to be between two to two and a half times on a net levered basis. Now, let's move to our operating environment and the financial results. I'd like to focus on two key messages today First, our renewed focus on profitability, working capital management, and cost management continues to pay off despite a difficult and unpredictable market dynamic and the macroeconomic headwinds we and our peers have been facing. While these headwinds are challenging to manage, we remain confident in our long-term strategy and our ability to deliver value to our customers. And secondly, we continue to face short-term headwinds related to consumer inventory actions, particularly in our home and garden business, that are more severe than we expected. And that will impact our fiscal 23 results more than we previously anticipated. Building on the first message, our focus on cash generation continues to pay off. We reduced inventory by another $170 million in the quarter. including our HHI business, following a reduction of $170 million in the preceding six months. That means, since turning our attention to running our business for cash and prioritizing cash flow and inventory reduction over earnings, we have now reduced our inventory by over $340 million, including HHI, during the last nine months. We continue to focus our operating priorities to maximize cash over earnings and reduce our overall inventory levels. The strategy is clearly working as this effort has resulted in positive free cash flow so far in the current fiscal year. While we will continue to focus on working capital management and strengthening our balance sheet, our inventory is now approaching appropriate levels to support the demand in the marketplace And further reductions will come from rebalancing our inventory profile to minimize excess inventory. On the cost side, we remain focused on simplifying our business model and reducing costs to operate as a leaner organization with a renewed financial discipline. To that end, we have made further fixed cost reductions and have eliminated additional headcount in certain focused areas of the organization. With all the cost actions in place, we believe we are well positioned to face the short-term headwinds while still maintaining key capabilities necessary to continue to invest in the long-term growth of the businesses. Now, building on my second message regarding these short-term headwinds, as expected, the consumer demand environment remained challenging compared to the strong COVID-related demand growth over a year ago. especially for the hard goods categories where demand is continuing to normalize to pre-pandemic levels. And our retail partners remained focused on inventory reductions in those categories. Additionally, our key retail partners in our home and garden business changed their strategy to reduce inventory in the quarter compared to a strong prior year pre-build ahead of the season. While our global pet care and home and personal care businesses performed in line or better than expectations, we were disappointed with the results in our home and garden business for this quarter, which were also impacted by adverse weather conditions and key markets late in the quarter. Our financial results obviously reflect these conditions, as our total sales declined 9.7%, while organic sales declined 10.1%. and Jeremy will provide more details by business unit in his comments. While this volume decrease was the main contributor of the EBITDA decline in the quarter, EBITDA was also pressured by unfavorable FX year over year, as well as the impact of selling down our higher cost inventory accumulated during the prior year periods. As a reminder, we started this fiscal year with approximately $55 million in excess capitalized variances on our opening balance sheet, and we expected to roll through our income statement in the first half of fiscal 23. We have now substantially sold all of that inventory, and we are seeing currently the expected profitability inflection point in our recent monthly results. If I can move your attention now to slide seven, in our high-level fiscal 23 earnings framework. We remain very pleased with the performance of our global pet care business, and we continue to see improvements in our home and personal care business despite the anticipated headwinds in its end markets. We also remain very confident in the long-term strategy for our home and garden business, but with the change in retailer inventory strategy that we experienced in the just-completed quarter, We expect sales in that business to be well below the POS levels in the fiscal year and therefore below our previous expectations. With the additional sales pressure, we now expect the H&G business will not reach its full earnings potential during this fiscal year and will fall short of our previous EBITDA expectation for that business. Based on this additional revenue pressure, we need to update our earnings framework. We now expect the top line for the year to decline by mid-single digits to last year. As a consequence of this sales decline, we expect our adjusted EBITDA to be down in the low mid-single digits. Before I turn the call over to Jeremy, I would like to thank our teams around the world who have worked tirelessly throughout a period of uncertainty related to the almost two-year pending HHI transaction. And while facing all the while the current market headwinds and making some very difficult short-term decisions to prepare our business for long-term success. Now you will hear more from Jeremy on the financials and our additional business unit results, and then we'll join you in the Q&A. I'll turn the call over to you, Jeremy. Thanks, David.