Spectrum Brands Holdings, Inc.

Good day and thank you for standing by. Welcome to the third quarter 2023 Spectrum Brands Holdings, Inc. 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 the session, you will need to press star 1-1 on your telephone. You will hear a message advising your hand is raised. To withdraw the question, simply 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 the Vice President of Strategic Finance and Enterprise Reporting, Faisal Qadir.

Good morning, everyone, and welcome to Spectrum Brands Holdings Q3 2023 Earnings Conference Call and Webcast. I'm Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we have placed a slide presentation on the event calendar page in the investor relations section of our website at www.spectrumbrands.com. The 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, our 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 August 11, 2023, 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 statement. Also, please note that we'll 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. David?

Hey, thank you, Faisal. Good morning, everybody. Welcome to our third quarter earnings update, and I want to thank all of you guys for joining us today. As usual, I'll begin with an update of the company's strategic initiatives, followed by an overview of our operating environment. Jeremy will then provide a more detailed financial and operational update, including a discussion of the specific business unit results. I'd like to start today's call by thanking and congratulating our Spectrum Brands colleagues around the world for all their efforts and tireless dedication to the company. I am very proud of the Spectrum Brands team for managing through these unprecedented challenges this year, including significant inventory demand volatility from our retail customers and the unanticipated DOJ lawsuit to block the sale of our HHI business unit. Our retail customers' inventory management strategies have made it exceedingly difficult for our business units to accurately forecast sales. The lawsuit and protracted timeline for the closing of the sale of HHI imposed a number of challenges, including executing our business strategies, maintaining employee morale with the uncertainty of the transaction, and adjusting our operating and working capital use strategies to comply with covenants under the HHI operating transaction agreements and our debt instruments. I'm truly grateful to the Spectrum Brands team for managing these challenges and getting us to the close of the HHI transaction, which has placed us in a materially better position to deliver on our operating and strategic plans for our company. If I could move your attention now to slide six. As a reminder, we completed the sale of HHI to Assobloy for $4.3 billion in cash on June the 20th, subject to customary purchase price adjustments. and we expect $3.8 billion in net proceeds after fees and taxes. With the close of this transaction, we have now become a net debt-free company, as we ended the quarter with $2.9 billion of cash in the bank and total debt of $2.1 billion. As we had indicated during our last earnings conference call, we've begun the process of deleveraging our balance sheet, and we have repaid $1.1 billion of bank loans since receiving the HHI sales proceeds. We also received board authorization for a $1 billion share buyback plan, and we entered into and funded a $500 million accelerated share repurchase program that continues to transact in the market today. Additionally, since the end of our quarter, we have repaid another $450 million of our outstanding debt by calling our 5.75% 2025 senior unsecured notes, which were callable at par. We are going to patiently and thoughtfully explore various options for the use of the remaining proceeds while we continue to earn investment income on our cash balances at rates that are well above our average cost of debt. On the strategic front, we remain committed to finding strategic and organic ways to enhance the value of our home and personal care business. We are very focused on turning that business around, improving its profitability while we continue to explore our strategic options. Now moving to our operating environment and financial results, I'd like to focus on two key messages. First, we are facing further short-term headwinds that are driving additional pressure on our top line, particularly in our home and garden business. That said, we remain confident in the long-term trajectory of our businesses, and we are seeing strong sequential profitability improvements. Secondly, our cash flow focus has paid off and the company's balance sheet has never been stronger. We are now able to make decisions that are going to set up the business for long-term profitability and success. Building on the first theme, cooler than expected weather conditions and greater than expected reduction of retail inventory levels negatively impacted our third quarter sales in our home and garden business. We now expect this season and home and garden sales to be worse than we previously anticipated. We also continue to see pressure in the small home appliance space due to lower consumer demand and continued higher than expected retail inventory levels. Our financial results reflect these conditions as our total sales declined 10.1%, while our organic sales declined 9.7%. Jeremy will provide more details by business unit in his comments. However, we are seeing the benefits of our earlier actions on cost reductions and price increases that are sequentially improving our gross margin rates. On the cost side, we remain focused on simplifying our business model and reducing costs further to operate as a leaner organization with a renewed financial discipline. To that end, we are seeing the benefits of our fixed cost reduction efforts. In fact, our EBITDA margin increased by over 600 basis points sequentially, the 13.4% in the third quarter. With all the cost actions in place, we believe we are well positioned to face these short-term headwinds while maintaining our key capabilities necessary to continue to now invest in the long-term growth of the business. If I could build on the second theme for a moment, You may recall we started the year with our end markets in decline, especially in the home and personal care space, and our leverage peaked at over six times during this fiscal year. Our immediate focus at the beginning of the year was therefore on cash flow generation and cost management to the detriment of our sales and EBITDA growth. On that front, we have delivered strong performance by reducing our inventory levels by over $250 million since the end of fiscal 22. As I mentioned earlier, with the completion of the HHI sale, we are now in a net cash position. With the strength of our balance sheet and our current cash balance, we have made the decision to discontinue our participation in various receivables factoring and early pay programs that we have historically taken advantage of to shorten our working capital cycle. Although these programs are a great vehicle when they're needed, they come at a cost, and that cost has been increasing with the backdrop of a much higher interest rate environment. We expect that the exit of these programs will result in one-time operating cash usage of over $250 million in the current fiscal year and potentially another $100 million in fiscal 24. Although our focus on the balance sheet has yielded significant reduction in our inventory balance, inventory at retail partners remain at an elevated level. We also continue to have some excess inventory, particularly in kitchen appliances. We're evaluating various alternatives to ensure we can improve the health of our inventory as we get ready to enter fiscal 2024. Moving to slide seven in our high-level fiscal 23 earnings framework, We remain pleased with the earnings performance of our global pet care business, and we continue to see improvements in the home and personal care business despite the headwinds in its end markets. We also remain very confident in the long-term strategy for our home and garden business, but we do expect this to be a difficult year for this business unit due to the cooler-than-expected weather and retail inventory-related sales declines. Given the additional pressure in the home and garden business in the second half of this year, we expect to be toward the lower end of our earnings framework, excluding the investment income from the HHI proceeds. Now I'll let you hear more from Jeremy on the financials and specific business unit updates and insights. I'll turn the call now over to you, Jeremy.