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spk00: Good day and thank you for standing by. Welcome to the Spectrum Brands first quarter 2024 earnings 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'll need to press star 1 1 on your telephone. You will then hear an automated message advising 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 host today, Joanne Chomak, Senior Vice President of Tax and Treasury. Please go ahead.
spk04: Thank you. Welcome to Spectrum Brands Holdings Q1 2024 earnings conference call and webcast. I'm Joanne Chomak, Senior Vice President of Tax and Treasury, and I will moderate today's call. To help you follow the comments, we have 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, our Chairman and Chief Executive Officer, and Jeremy Smeltzer, our Chief Financial Officer. After 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, Speck & Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated February 8, 2024, our most recent SEC filings, and Speck & 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 will discuss certain non-GAAP financial measures in 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. Now I'll turn the call over to David Mora. David?
spk01: Hey, thanks, Joanne. Good morning, everyone, and welcome to our first quarter earnings results for 2024. Thanks to everybody for joining us today. I'm going to start the call with an update on our operating performance and our strategic initiatives. Then I'll turn the call over to Jeremy, and he'll provide a more detailed financial and operational update, including a discussion on the specific business unit results. If you remember during our last call, I talked about how the actions we took in fiscal 23 that put us in a strong position as we entered fiscal 24, and I talked about our readiness to pivot into the opportunities that our strong balance sheet and improving margins now present us with. Today, I'm happy to report that the first quarter is showing that we're beginning the journey back to winning again. If I could have you turn your attention to slide six and our financial performance. Net sales for our first quarter were down 3% in line with our expectations overall. Retailer and consumer demand are behaving as we had expected heading into the year. We anticipated a continued challenging macroeconomic environment across our businesses and a competitive retail marketplace. In our home and personal care segment, we expected suppressed demand, particularly in small kitchen appliances. In our home and garden segment, we expected home center retailers to be cautious in their pre-season build of inventory. And in our global pet care segment, we expected continued softness in our global aquatics business and slowing growth in our treats and chews businesses. Each of those expectations have come to be true, and our top line performance came in generally as we had anticipated, With an especially strong performance, however, from our global e-commerce sales group, they grew sales at 28.3% year over year. We are encouraged now that retail inventory levels are healthier than they were last year, which means that our top line should now be more aligned and consistent with our retail customers' point of sale. Including $23 million of investment income from our large cash balance, Our adjusted EBITDA was $84.3 million in the first quarter, which is up $44.5 million from the period a year ago, with strong improvement in all three business units. Our earnings power is getting back on track, and our commercial and operational performance is improving. Gross margins are up 710 basis points over the first quarter of fiscal 23, and our adjusted EBITDA margins doubled compared to last year. This quarter's results benefited from lower cost inventory as compared to last year, as we predicted. The fixed cost reductions we took in prior years and our productivity initiatives are also improving gross margins and our bottom line. Our balance sheet is stronger than it's ever been in the history of this company. A year ago, our pro forma net leverage had climbed over 6.2 times, and we had over $3.1 billion of net debt on our balance sheet. We ended this quarter essentially net debt free, with less than $20 million of net debt. Our strong balance sheet is a competitive advantage that we are now leaning into, and we're using it to fuel investments back into our businesses to drive top-line growth. We have now pivoted from managing this business for cash to focusing on the long-term growth of all of these businesses and driving operational efficiencies. If I could now have everyone turn to slide seven on the investor presentation. The improvement in our performance and our journey towards winning again is being driven by three core areas of focus. One, we are investing behind our people. to improve commercial capabilities and drive a culture of accountability. Our revamped leadership teams in both our home and garden and HPC businesses are reinvigorated and they're developing new growth opportunities for us every day. The recent key hires in senior sales and marketing positions are making a difference in our culture and how we work together with our retail partners. Our investments in bolstering our commercial operations innovations, and sales and marketing capabilities are starting to pay dividends. Two, we are investing behind our brands and new product roadmaps to continue to focus on bringing fewer, bigger, but better innovations to the marketplace. This quarter, the team started to ramp up their investments in brand marketing, advertising, and innovations. As the teams develop their plans, we expect these investments to increase in the coming quarters. In HPC, our appliance segment, we had a much healthier start to the year, including a solid holiday selling season, with all international regions delivering core sales growth. Given the improved performance of this business and our healthier outlook for it now, we are starting to accelerate the process to separate HPC via a sale, merger, or a spin in hopes to have a transaction announced later this year. From an operations perspective, we are investing to drive efficiency and reduce cost. We have completed the implementation of a comprehensive five-step S&OP process across all three businesses that is helping ensure that we are sourcing and producing the right product at the right time. Our Q1 fiscal 24 inventory is down $360 million from the high point in the third quarter of fiscal 22, and it's down $245 million from the first quarter of fiscal 23. This lower investment in inventory helps not only our cash flow, but it also helps our supply chain operations be much more efficient. Our fill rates across all three businesses have increased, however, an average of 600 basis points since last year, despite the massive inventory reductions. These higher fill rates are helping to improve customer relationships, reduce the risk of lost POS, and provide cost savings from reduced customer fines and penalties. We can now turn to slide eight. Since the close of the HHI transaction, We've been very judicious about returning capital to our stakeholders. We have returned over $825 million to our shareholders since June of last year through our various share repurchase programs. We've reduced our share count by 26% to just 30.2 million shares outstanding. We closed the ASR we had in place in November, and we very actively repurchase shares in the open market during the first quarter of this fiscal year. In December, we entered into a new $200 million 10 plan that's subject to certain parameters will trade through November 15 of this year or until the cap is reached. As of today, there's approximately $140 million remaining on that plan. As we keep delivering on our commitments, grow our earnings, and shrink our share count, we believe our share price will eventually react positively. Turning to slide nine, or page nine, sorry. We are encouraged by the first quarter results this year, but we remain prudent in our full year expectations. We're facing new geopolitical and macroeconomic headwinds, for instance, like the Suez Canal and the Red Sea terrorist attacks. And we continue to see economic uncertainty as we look into the year ahead. We know that one quarter simply does not make the year. However, we are encouraged by our strong start to fiscal 24. We are a company now operating from a position of strength again, and we are looking forward to continuing the improvement in our commercial and operational performance in the coming quarters. Before I turn the call over to Jeremy, I would like to sincerely thank each and every one of our global employees who are absolutely at the center of helping us start to win again. Thank you. Now you'll hear more from Jeremy on the financials and additional business unit insights. I'll turn the call over to you now, Jeremy. Thanks, David.
spk09: Good morning, everyone. Let's turn to slide 11 and a review of Q1 results from continuing operations. I'll start with net sales, which decreased 3%. Excluding the impact of $11.7 million of favorable foreign exchange, organic net sales decreased 4.6%, primarily due to lower consumer demand in North American small kitchen appliances, some softness within certain pet channels, and the impact of the skew rationalization decisions we made in fiscal 23 within our global pet care and home and personal care businesses. The sales decline was in line with our expectations heading into the quarter and was incorporated into our earnings framework. Gross profit increased $43 million and gross margins of 35.4% increased 710 basis points largely driven by lower cost inventory and inventory related expenses, along with a favorable impact from cost improvement actions, partially offset by unfavorable transaction effects and lower volume. Operating expenses of $219.9 million decreased 1% due to reduced project spend on restructuring, optimization, and strategic transaction activities, fixed cost reduction efforts, and lower factoring charges offset by increased investment spend in advertising and marketing as we reinvest in our brands. Operating income of $25 million improved by $45.2 million, driven by the gross margin improvement and lower operating expenses I previously mentioned. Gap net income and diluted earnings per share both increased, primarily driven by the higher operating income, higher investment income, lower interest expense, lower share count, and a gain recognized on the repurchase of bonds. Adjusted EBITDA was $84.3 million, an increase of 111.8%, driven by improved gross margins and the investment income of $23 million. Adjusted EBITDA excluding investment income was $61.3 million. Adjusted diluted EPS increased by $1.10 to $0.78 per share, driven by higher adjusted EBITDA and the reduction in shares outstanding. During the first quarter, we reduced our outstanding shares by over 12%, or 4.4 million shares, with our previously announced ASR closing and additional open market repurchases. As David discussed, our current share count is 26% lower than it was prior to the closure of the HHI transaction. Turning to slide 12, Q1 interest expense from continuing operations of $19.2 million decreased $14.2 million due to our lower outstanding debt balance. Cash taxes during the quarter of $3.4 million were $2.7 million lower than last year. Appreciation and amortization of $25.5 million was $2.9 million higher than the prior year. And separately, share-based compensation increased by $600,000. Capital expenditures were $8.4 million in Q1, down from $10 million last year. And cash payments towards strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments were $15.5 million versus $33.2 million last year. Moving now to the balance sheet, we had a quarter-end cash balance of $445 million plus $950 million in short-term investments and $487 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $1.4 billion, consisting of $1.3 billion of senior unsecured notes and $85 million of finance leases and other obligations. During the quarter, we repurchased $179 million of our outstanding bonds, and we ended the quarter essentially net debt free. Now let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results. I'll start with Global Pet Care, which is on slide 13. Reported net sales decreased 0.2%. Excluding favorable foreign currency, organic sales decreased 2%. Our companion animal business grew low single digits and was offset by a double digit sale decline in our global aquatics business. The global aquatics marketplace remained challenged compared to last year, due in part to lower foot traffic and sales within the pet specialty channel, as we have seen some North American consumers trade down toward value channels. Recall that this quarter's North American sales were adversely impacted by our decision last year to exit several non-strategic categories such as waste management and lower profit skews. These activities have reduced our North American active item count by nearly a third. And while the impact from a top line perspective is a purposeful headwind, these actions are having a positive impact on margins, terms, and cash flow. Sales in EMEA increased due to growth in the companion animal category. with especially strong growth in our dog and cat food sales, which more than offset organic sales declines in aquatics. In North America, overall sales declined with lower aquatic sales and the impact of our skew exits offset by sales growth in companion animals. We were especially pleased with our companion animal growth in the e-commerce and dollar channels. On the innovation front, we are launching a new aquatics campaign, Kids Love Aquariums, to bring new participants into the category by highlighting that aquatics is a hobby families can enjoy together. Our cat treat business under the Meowie and Good and Tasty brands continues to perform well online, and we are aggressively pursuing new brick and mortar distribution and line expansion to accelerate growth. We have also secured expanded distribution for our dog treats, also under the Good and Tasty brand, building on last year's successful launch and further expanding our reach into new categories. Adjusted EBITDA for GPC increased by 41.7% to $52.7 million. The increase of $15.5 million was primarily driven by a favorable comparison to last year's sales of higher cost inventory, favorable mix due to the exit of low margin SKUs, and our continued focus on cost reduction measures. This was partially offset by lower volumes, increased investments in advertising, and FX. This is the third consecutive quarter where the GPC business delivered adjusted EBITDA over $50 million. We continue to feel good about the margin profile of GPC and believe that the decisions we have made are continuing to support a higher margin, healthier global business. We remain cautious about certain categories primarily within the pet specialty channels, but we expect the positive trends in companion animal consumables to continue, albeit at a slower growth rate. We continue to expect fiscal 24 to have lower top-line growth than our long-term target, particularly in the first half of the year, due to the impact of our skew rationalization efforts and the challenged aquatic demand. Moving now to home and garden, which is on slide 14, Net sales increased 0.8% in the first quarter, driven by sales growth in the controls category, offset by softness primarily in our cleaning category. Orders were aided by the warm fall season, where we experienced retailer and consumer demand continue further into the fall than recent years. We are encouraged by the sales growth we saw in Spectracide, where our largest brand is winning share, and our Hot Shop brand, where we have invested in recovering market share. The first quarter represents a very small portion of the annual consumer activity for this business and is predominantly focused on preparation and staging for the seasonal business, which starts to ramp up later this quarter. Retailers ended last season with healthier inventory levels than in 2022 and are now building inventory cautiously but in a more typical manner compared to 2023, when they started the season with higher inventory levels and POS exceeded orders throughout the season. We believe retailers will continue to be cautious in building inventory for the season in our second quarter. In cleaning, our Rejuvenate brand sales declined, but at a slower pace than in prior quarters. Demand in certain parts of the cleaning segment has not recovered to pre-COVID levels. In fiscal 24, we are investing in innovation and brand support to drive top line growth and expanded listings for this product line. We are excited about updated product design and packaging that we expect to be on shelf later in the second quarter. I believe that consumers will react positively to the efficacy and strong value of our products. We are planning for a 2024 season with weather that is similar to the 2023 season but with retailer orders much more in line with POS than in 2023. We will continue to collaborate with our key customers as we head toward our peak lawn and garden season to understand consumer demand expectations. We are pleased with the traction our new innovation is gaining with retailers and the outlook for our expanded Spectracide OneShot line, Cutter Eclipse, and Repel Realm products. We are encouraged by early orders for displays, and off-shelf placement for our new innovations. Adjusted EBITDA for home and garden improved by 1.7 million. The adjusted EBITDA increase was primarily driven by manufacturing efficiencies that carried into the year and ongoing cost improvement initiatives. This was partially offset by increased investments in advertising in preparation for the lawn and garden peak season and behind the Rejuvenate brand. Labor and raw material costs continue at the higher levels we saw in fiscal 23. We are anticipating a competitive retail environment in home and garden this year and are ready to react as the season develops. Finally, we'll turn to home and personal care, which is slide 15. Reported net sales decreased 5.8%. Excluding favorable foreign exchange, organic net sales decreased 7.6%. The organic net sales decrease was driven by lower sales in the North American market, where the small kitchen appliance category continued to decline year over year, but at a slower rate than prior quarters, offset by sales growth in the EMEA, LATAM, and APAC regions. Sales in the EMEA region grew low single digits, with growth in personal care from strong e-commerce sales, offset by a decline in home appliance sales after last year's strong top-line performance. Sales in LATAM and APAC also posted low single-digit growth. As we expected, North America had double-digit sales declines, primarily in small kitchen appliances and the power XL business due to continuing challenging demand and our exit of certain TriStar SKUs in fiscal 23. Overall, we had a strong holiday season with higher than expected sales in e-commerce. We also had a unique opportunity to fill a supply gap when one of our competitors in the kitchen category filed for bankruptcy, helping our top line during the holiday season and creating opportunities for ongoing sales. Retailers continued to work through high inventory levels this holiday season, but closed with healthier levels than a year ago. However, we do expect soft consumer demand to continue, particularly in air fryers and toaster ovens. Virtually, our Remington One launch has been particularly effective in EMEA, capitalizing on the higher price point for Remington in that region, and we plan to continue to invest behind the Remington One program throughout fiscal 24. We are extremely proud of the Good Design Award received by three of our Remington One products, the Drying Style, Straight and Curl, and Multi-Groomer. This annual award is presented to global, innovative, and cutting-edge industrial, product, and graphic designs, and comes off the back of our successful global launch event in New York in November of last year. Our Remington Balder Pro Head Shaver is also gaining media attention, recently named the best electric and overall bald head shaver by GQ magazine. Adjusted EBITDA doubled to $26.7 million. The higher adjusted EBITDA margin of 7.8% more than doubled from 3.6% in the prior year, driven by lower cost inventory and inventory related expenses, our reduced focus on low margin promotional events, and the continued benefit of our cost improvement initiatives. This was partially offset by lower volume, increased brand focused investments, and the impact of unfavorable foreign exchange rates. Looking forward, we continue to expect HPC sales to be down for the full year with first-half softness and a return to top-line growth in the second half of the year. We expect soft consumer demand, particularly in the air fryer and toaster oven categories, and expect a continued challenging competitive environment in North America as demand normalizes. Let's turn to slide 16 and our expectations for 2024. We are reiterating our expectation for net sales to decline low single digits, driven by lower consumer demand, particularly in the small kitchen appliance category within HPC. Adjusted EBITDA, excluding investment income, is expected to grow in the high single digits, driven primarily from lower cost inventory as compared to last year, offset by our investment and our brands and people. We also expect some pricing pressure in home and personal care as competition is expected to remain fierce. From a phasing perspective, we continue to expect the demand pressure in the home and personal care segment to be more pronounced in the first half of the year. We expect our home center customers for the home and garden business to wait until spring to take on material inventory in preparation for the season. These factors, along with the product portfolio rationalization impact in the global pet care and HPC businesses, will pressure top-line comparisons to last year, particularly in the first half. Turning now to slide 17, depreciation and amortization is expected to be between $115 and $125 million, including stock-based compensation of approximately $15 to $20 million. Cash payments towards restructuring, optimization, and strategic transaction costs are expected to be approximately $40 million, Capital expenditures are expected to be between $75 and $85 million, and cash taxes are expected to be approximately $40 million. For adjusted EPS, we use a tax rate of 25%, including state taxes. To end my section, I want to echo David and thank all of our global employees for their hard work and commitment during the strong start to fiscal 24. Now back to David.
spk01: Hey, thank you very much, Jeremy. Thank everybody for joining us today. Let me just take a couple minutes and recap the key takeaways for today on slide 18. First, we're very pleased with our start to the year. Demand came in generally as we had anticipated. Our commercial and operational performance is improving, and our margins are expanding. Our balance sheet is strong. In fact, it's stronger than it's ever been in the history of our company. And this is a competitive advantage. that is fueling the growth mindset for our company. We are returning cash to our shareholders. We bought back 26% of this company and remained essentially net debt free. We are beginning the journey back to winning by investing in our people, investing in our brands, and investing in our operations. Although we are in the early days, we are encouraged by the results we've been seeing. We believe we are on the right track and the right path to returning to revenue growth with improving margins and EBITDA. However, we know this is just one quarter, and we are already facing new geopolitical and macroeconomic headwinds like the Suez Canal and the terrorist attacks in the Red Sea, and frankly, continued interest rate uncertainty. So while we're encouraged by the start of our fiscal year, We think it would be prudent to maintain our full year expectations and are thus reconfirming our earnings framework for the full year. I'm excited about the future as I see our teams focusing on fewer, bigger, better innovations. And we are continuing to ramp up our commercial operations now through added investments in sales and marketing. With our operational house now in order, our primary focus is to return to revenue growth. and our aim is to deliver consistent operating performance and to realize a material uplift in the valuation of our shares. Now I'll turn it back to Joanne, and we'll take any questions you may have.
spk04: Thank you, David. Operator, we can go to the question queue now.
spk00: As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk03: Our first question will come from the line of Bob Labic with CJS Securities.
spk12: Good morning. Congratulations on a nice start to the year, and thanks for taking our questions. Bob, thanks.
spk01: Hello, Bob.
spk12: Yeah, so obviously a nice recovery versus the last few years in HPC. You talked about it a little bit, but can you tell us what does it take to get that segment back to prior margins and discuss the competitive landscape in appliances in a little more detail? Any changes of late that you alluded to, please?
spk01: I think, listen, I think the last two years, you know, a lot of volatility in that category industry. You know, I think with, you know, the pandemic, and the supply chain problems, retail customers trying to get their hands on any and any appliance they could because people were living in their homes and had nothing to do except cook and clean. We saw a number of new entrants into the market, and these new entrants were willing to work for next to nothing. And so I think the industry experienced a tremendous amount of disruption. And quite frankly, you now see some of those players, as Jeremy referenced in his remarks, going bankrupt. And so I think as some of these small ankle biters, startups, fly-by-night companies go bankrupt, exit the market, we believe for some time the industry needs to be more rational, needs to be rationalized, needs to consolidate. I think you're just getting a return to normal. You know, I think we still don't see demand patterns where they were prior to the pandemic, which is why, you know, we're maintaining kind of a, you know, a low single digit decline in sales kind of outlook. But, you know, hopefully as we get back into a more replacement cycle, you know, post-COVID environment, we know the inventory levels at retail is back down. And so, you know, we expect more consistent operating conditions. and ordering patterns to be consistent with POS now. But look, for us particularly, we've got a brand new management team. We've invested a lot in new talent. We just hired a new head of North America, Tim Wright, who's running our UC operations and quite frankly doing an amazing job building brand equity franchises and teams over there. Number one, Russell Hobbs in England, a very profitable Boeing Remington franchise in APAC. You know, he is now taking over control of that entire business unit. And we're investing in Wolfhound. So pretty excited about, you know, Tim Wright's leadership there, the talent upgrade in that organization. It's only one quarter, Bob. We've got a lot of wood to chop, but we've told you if we could be patient with us and we can get that company back to health, now we're getting on a better trajectory. We can re-look at accelerating, standing that business unit up on its own and potentially merging or spinning it.
spk12: As a follow-up, You talked about merge, spin, sale, et cetera. Who is the right owner and what's the optimal structure for a deal for you?
spk01: Yeah, I mean, that's just a lot of specifics. I'm probably not prepared to get into that at this point, but we know that like assets tend to have tremendous amount of synergies to them because most of these businesses are sourcing from the same vendors and selling to the same customers. We know that the industry still has too many players. We think we have a very strong EMEA APAC platform. Our focus is on strengthening our North American platform, and then hopefully we become a much more attractive partner to others. I think that would be my preferred outcome here is to find a merger partner with Synergy so we could participate in. But the only thing within my control to do without a counterparty is a spin, and so we will pursue that, and we'll see where we come out.
spk12: Super. Thanks so much.
spk01: Thanks, Bob.
spk00: Thank you. Our next question will come from the line of Chris Carey with Wells Fargo Securities.
spk06: Hi, good morning, everyone. So just to start, David, can you just talk about, you know, potentially any constraints you might have on additional deployments of cash and to share repurchases and specifically related to some of the constraints in the bond documents going into the summer, and in general, just how you're thinking about the balance of reinvestment versus M&A.
spk01: Yeah, I mean, listen, I mean, I think we've been really, one thing we've been very consistent about is that we believe that, you know, a higher growth, higher margin pet and home and garden platform deserve a higher multiple. And we had this unfortunate delay that cost us two years with the DOJ. And that's behind us. And, you know, when I look externally and I see that people want, you know, 15 times EBITDA and, you know, 17 times EBITDA and, you know, all these multiples for private assets. And, you know, we happen to own, I think, an amazing pet franchise, an amazing home and garden franchise. uh you know our view of the world is hey if we can pay our debt off which we just did right we had three billion plus of debt now we've got none you know we were almost seven times levered at the peak there and getting amendments from our bank group you know today that's done i don't i don't have any bank debt on the balance sheet except for a revolver that i'm not using um you know so now get our operational house in order so um you know big shout out to you know dave gabriel Steve Keller, Bob Vollmer, Mike Wilcox. I mean, I have an amazing S&OP team. And if you guys looked 18 months ago, I had to replace a lot of people. And I told you we were going to create a world-class working capital business and S&OP process. We've got that. And so now my operational house is in order. We're expanding our EBITDA. We're growing again. Margins are expanding. And, you know, we want to be responsible. We want to return a lot of capital to our shareholders. We want to reward shareholders. I'm a big shareholder. I like getting rewarded. Our shares have not performed the way I want them to, and we want to materially lift the share price. And I think the next step toward doing that is to continue to shrink the flow, be very prudent about our debt obligations, you know, come June, July. But if we can demonstrate consistent operating performance, shrink the flow, and spin appliances. I don't know why we as shareholders can't materially benefit from that, and that's what we're going to go do.
spk06: Okay, very helpful. Just one follow-up on the garden side. Any early read-throughs on competitive activity and shelf placement? I think one of your peers in the space, not necessarily on the control side, is talking about a lot of incremental facing. So just what are you seeing for your own portfolio? Thanks.
spk01: Hey, look, we think it's a really competitive market out there. We think the retail environment is challenging. We respect our competitors. We've got a debt-free balance sheet. We're playing to win. Game on.
spk09: Yeah, I think we are seeing, Chris, from the home centers that they're going to lean back into more displays than they did a year ago. I think that strategy was a difficult one for them. So we're seeing more displays, more off-shelf placements, and we're winning, I think, more than our fair share of those as we head into the season.
spk06: Okay. All right. Thanks so much.
spk09: Thank you.
spk00: Thank you. Our next question will come from the line of Peter Grom with UBS.
spk07: Thanks, operator, and good morning, everyone. Hope you're doing well. So maybe just one for me. Obviously, a very good start to the year across the board, and I totally understand that it's early, wouldn't necessarily expect you to kind of alter your guidance at this point, particularly with the bulk of home and garden still to come. But how would you characterize your confidence in the outlook today? You know, last quarter, I think, Jeremy, you were kind of mentioning that you thought it was balanced, it wasn't your stability. How has that evolved at all given the strong start?
spk09: A couple of things I'll start with, Peter. One, David mentioned that we do have a headwind that we've had to absorb into our earnings framework from this Red Sea challenge. We're seeing surcharges really globally in ocean freight. That's probably a $10 million to $12 million headwind for us on the year. The good news is we're covered contractually against the spot rate increases that we're seeing at these volumes. But the surcharges are hurting us, so we're absorbing that. So that's kind of one headwind. And the other thing I would just point out is that part of our first quarter beat, quite frankly, is we didn't spend as much in our increased brand investments as we expected. I think we increased around $5 million year over year. That's probably about half what we had allocated to. And so we moved that spend into the back half of the year. where we think there'll be more robust consumer demand. So there are some timing elements to it as well. But overall, I would say with what we've experienced from the consumer demand side and what we're hearing from home centers and seeing in displays and off shelf, I'd say we feel slightly more positive than we did 90 days ago.
spk03: Still there, Peter?
spk00: Our next question will come from the line of Brian McNamara with Canaccord Genuity.
spk11: Hey, good morning, guys. Thanks for taking the questions. On home and garden, I think we've heard some mixed messages in the marketplace over the last couple of days. One of your peers saw its garden business benefiting from early season shipments. Another expects more seasonal load-in. You have been pretty consistent in your messaging in terms of home centers being cautious in the preseason build of inventories. Can you provide a little more color on what's going on here, both on Q1 for yourselves and your expectations for Q2 in home and garden? Thanks.
spk01: Yeah, I think the first thing would be, you know, just because we have certain competitors that are publicly traded doesn't mean that our mix of sales is the same. And so I think you need to look at the mix of sales of our competitors. A lot of them sell seed and growing media stuff, and we don't. And, you know, before you have weeds, you need to grow something and We come in and kill the weeds after you grow stuff. So there might be a timing difference there. Jeremy, anything you want to add to the question other than that?
spk09: I think that's exactly right. I think the earlier load-in for home centers happens for a lot of those things that we don't do that David just mentioned. So I think that's why you hear what you hear from competitors.
spk11: Okay. And then secondly, on HBC, I mean, it's, I think we're six quarters in on, you know, some pretty significant declines on the top line, I guess. What gives you guys confidence that we should see a return to growth in H2 and any color on the phasing as it relates to Q3 and Q4 would be helpful. Thanks.
spk01: Yeah, look, I think, you know, the last 12 months, again, you know, seeing Tim Wright's phrases, you know, he and I have been on a lot of airplanes. We've been meeting with a lot of customers. We've been, know making up for past sins and um we've been uh you know trying to fix relationships mend fences and bring them better product offerings and so you know i think you know a couple years ago um you know we were telling retailers we were exiting certain brands and and um you know i think you know we had some we had some missteps with uh an acquired business and um you know we've spent a very uh good amount of time the last 12 18 months really fixing relationships, cleaning up the marketplace, owning our sins, and then bringing forth new product and new innovation. Actually, I'm pretty bullish on regaining listings as we go forward, even some of them hitting as early as the fourth quarter of this fiscal year. Much more solid footing, and again, all credit to the team. a lot of new talent, particularly being hired in the North American market as we fix that and make that more profitable and restore it to growth like our European markets.
spk11: Maybe if I could just squeeze one last one in for Jeremy on the housekeeping front. On gross margin, obviously a big expansion year over year in Q1, is this kind of mid-30s range a reasonable run rate to expect for the full year?
spk09: I think it is, yeah. you know, not a lot of variables that we're seeing on inflation. The only real caution that we see on the radar right now is the Red Sea surcharges that I mentioned. So we're watching that closely, obviously, but I would expect that, you know, we can continue at this pace as the year progresses on gross margins.
spk11: Thanks a lot. Best of luck, guys.
spk00: Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer.
spk02: I agree. Thank you very much. I just want to ask one more question on HPC. As far as divesting or any corporate action there, why now? What's giving you the confidence to maybe move forward on that? I think when you did TriStar, I think you guys threw out like an over $100 million EBITDA number. We're not quite there yet. So What are you playing for as far as EBITDA and that business? What do you think maybe the underlying profitability of it is? Do you still think it's at that level you previously said? Again, why now versus waiting to bring it back maybe to that level? Thanks.
spk01: Actually, I think our investor base believes, as I do, that we have higher multiple trading businesses in Pet and Home and Gardens. And I think our investor base believes that separating appliances out will allow Remainco to trade at a higher valuation. You know, that's the premise of doing it in the first place. I think that, you know, we had clearly anticipated trying to get it out sooner rather than later, and we entered a pandemic and supply chain and all the wonderful things. that we talked about earlier in the call. I think as we get it back to health, it belongs to stand up on its own. We'd like to continue to have some management and some ownership in it, but the only thing we can control without a counterparty is the spend. That's our fiduciary obligation. um but you know we're putting a lot of money behind it we're hiring a lot of new talent and you know we believe that we can build a global champion with that appliance business and stand it up but um you know i think you know talking to shareholders you know shareholders would like me to get it independent of pet and home and garden and so we're just letting you know as we did all last year hey we need to get this thing healthy profitably uh you know we don't want to spin something out that isn't healthy and so we want to get the company healthy But as we restore health and profitability, we're going to ramp up efforts to separate it.
spk09: And I just add, Ian, from a timing perspective, right? I mean, look, we just reported a quarter where we doubled EBITDA year over year, you know, $26 million and change. And as I mentioned in my prepared remarks, we're expecting really each quarter, the next couple quarters, sequentially for the top line to improve. You know, we mentioned that every region... with the exception of North America, is now growing organically. And so we're implying that North America is going to get better. It got better in Q1. We think more of that's coming. We're winning more in e-comm. We're starting to get more shelf placements with some of the legacy brands that we had lost some in the past couple of years. And so I think all those things just lend themselves to a better marketing story for the business in any event whether it's you know spend or a private transaction so that's the that's the point of us saying we're going to accelerate that now as we you know see the forecast improving okay um thank you very much thank you thank you our next question will come from the line of olivia tong with raymond james
spk13: Great, thanks. Good morning. Hi. I was wondering if you could talk a little bit more about what you're changing to position yourself to drive the innovations and eventually top-line growth that you're talking about, whether it's additional personnel, you mentioned some managerial changes, investments that you have made or planning to make, and when do you think you actually start to see that year-over-year improvement in aggregate? And then just sort of where that growth is necessarily coming from. And then you talked about profitable growth, but can you talk about also magnitude of brand spend, especially as you pivot to more of a focus on revenue growth? It's obviously been a tough go over the last couple of years. So as you consider new products, innovation, etc., what you're doing in order to support healthy launches when the time comes and what's embedded into the outlook. Thank you.
spk01: I think the main thing is the mindset shift. I think, you know, years ago, you know, we had an approach where, you know, each R&D department or NPD group, you know, would look at 50 or 100 projects. And I don't think any one of these particular projects in the past were big bets. I think people looked at, okay, let's tweak this packaging, let's tweak the color, let's tweak a feature. You know, maybe if we get a listing here, it's another million bucks. If it fails, you know, it's not that big a failure. And you just can't move a needle if you're constantly trying to launch 100 products a year in home and partner, 100 new products a year in patent. You know, we put it in the press and in the script, you know, We've hired a lot of new talent, and we've changed the mindset to be we want to take more risk. We want to launch fewer, bigger, better innovations. And it brings a lot of focus and clarity, quite frankly, to your organization. If instead of focusing people on 100 new SKUs, you say, look, we want 10 new products, and we want them to really move the needle, where can you move the needle? And so you've already seen it. You see little green shoots of it, right? We're very, very good in dog chews and treats, but we've never been in cat. We did an amazing acquisition in the UK called Armitage. It brought us a brand called Good Boy and it brought us Meowie. And, you know, we're taking those businesses and we're launching complimentary products into the pet space in the US, particularly cat treats. The other thing that is very different that we never did in the past, and a lot of credit to Mir and our comm ops team, we do stuff now called test and learn. And so we don't work on a product and then take it to every brick and mortar and say, here it is. We want to test and learn that product with the customer in real time so that we get feedback on that product, we refine that product you know not not some survey not some theory but thousands of customers telling us what's good with it what's wrong with it and then we refine that product offering to create a fat pitch and that is a very different approach um but we believe it has potential to yield big results and so that's i think that's a little bit of the answer to your question hopefully it helps a little bit um jeremy is another part of that question
spk09: Yeah, I think the last part of the question was on timing. You know, we're seeing some wins. I think they start to impact our financial results in the second half of the year from a top-line perspective, which is why we talk about our confidence and growth in the second half. So I think it's coming very shortly.
spk00: Thank you.
spk09: Thanks, Olivia.
spk00: Thank you. Our next question will come from the line of Michael O'Brien with Wolf Research.
spk08: Hi. Good morning, guys. Just a quick one here. So regarding the margin structure, so obviously you have this high-cost inventory rolling off, which is going to be a tailwind to the business. Could you provide a little bit more color, though, on any other margin improvement initiatives that you're currently undergoing? And then my second question is, to offset some of the volume decreases, are you planning to, you know, increase price in the back half of this year as well? Thank you.
spk09: Yeah, I think on the latter, I'll start there, Michael. You know, I don't anticipate significant pricing actions in the second half of the year from where we sit today. Clearly, external factors could change that if we see, you know, a more material impact from some of the political factors and geopolitical challenges that we see. Red Sea mentioned earlier could be one. But right now, no, I don't think that's necessary. On the additional cost reduction efforts, you know, what I would say is if you look at gross margin or gross profit dollars, you know, in the quarter up, you know, 36, 37 million, you know, as we talked about last year, we had that higher cost inventory last year that was cap variances of around, I think 26, 28 million in the quarter. So we actually are improving gross profit dollars more than that lower cost inventory benefit that we're receiving. And that's on top line decline of 3%. So that, I think, shows you the improvements in operations and the efficiencies that we're getting. And a lot of that comes from continuous improvement activities across our supply chain and manufacturing operations. And I'll give all the credit to the same people that David mentioned earlier, I think they're doing an extraordinary job in partnering with our commercial business units very well to get those savings, to maintain our fill rates, and actually still grow share, all with lower inventory dollars on the balance sheet. So I think we're in a really good place there.
spk08: Great. Thank you.
spk09: Thank you, sir.
spk03: Thank you.
spk00: Our next question will come from the line of William Reuter with Bank of America.
spk10: Hi, I just have one. Hey, good morning. Following up on Chris, his question earlier, talking about capital deployment, David, in your response, you talked about multiples of 15 and 17 times. It certainly sounded to me like you believe your stock is far cheaper than any M&A opportunities that are out there and that M&A is not a focus in the near term. Did I read that correctly?
spk01: Yeah, I mean, I've personally been buying shares, so that should tell you I think the stock is cheap. We bought back 26% of the float, and we're accountable to where it goes in the future. And yeah, private assets continue to cost more than where we trade, and we're working hard to fix that. And we think the two big levers to pull there to basically become a very consistent operating performance business and to separate out our appliance business. And we think that through consistent operating performance and separating out appliances, we will experience a material uplift in multiple. That said, we're not going to shrink ourselves to greatness. And if we do find a great acquisition in pet or home and garden, we're going to pursue it. I don't see anything to do right now, and I'm not looking at anything, but we have a very good track record of acquiring assets in the pet division, a very good one in home and garden. We're fixing Rejuvenate, and we'll see where we go.
spk10: That's a very helpful response. Perfect. Thank you. That's all for me.
spk09: Thanks, Bill.
spk00: Thank you. Our next question will come from the line of Carla Casella with J.P. Morgan.
spk05: Hi, great. Carla Casella here. Carla, good morning. What?
spk01: Carla, good morning. Nice to hear your voice.
spk05: Good morning. Good to hear yours, too. Did you say which bonds you had bought back in the quarter?
spk01: I couldn't quite catch you. Bonds? We bought a bunch of different bonds, all kind of different coupons. Typically, they'll lower the dollar amount, then I'll buy them. But you guys keep bidding them up, so I don't know if I'm interested anymore.
spk05: No, I know, because people are assuming more. So that goes to my second thought. To get to your 2.5 times leverage target, it clearly means bringing leverage up from where it is today. And I'm assuming that happens through share buybacks. I'm just wondering, do you expect to have to come back to our market or absent M&A, any debt activity we should expect?
spk01: Yeah, I mean, it's three-pronged, right? We've definitely been using the buyback of shares to absorb our excess cash. We're entering a net debt position now, albeit small. If we exhaust the remaining buyback plans in place, I still don't think it puts us right around one turn of leverage. And then we have enough cash on hand, quite frankly, to basically meet the bond obligation this summer if we don't do any M&A before then. But clearly, the covenants allow us to do M&A. And if we were to find something to acquire, that would reduce our need to offer cash for the bond. So we're looking at all those things. We're monitoring interest rates. Right now, we're very happy to keep a large amount of cash on deposit, get paid some interest income, buy back our shares, and focus on operations.
spk09: Carl, I would just add to that. There's no hurry in the fiscal year to get to that two to two and a half times that leverage. That's our longer-term target.
spk01: Yeah, good point.
spk09: We'll be prudent in how we get there. We'll make sure that capital is deployed in the right way.
spk05: Okay, and then on the bond obligation to pay down this summer, That's if you don't fully invest. Can you say how much of investment spend you have left? Because I'm not sure what calculates as an investment or not.
spk09: What we've said publicly, Carla, and we're going to stick to that through the summer when we actually get to that point in time, which will be the June-July time frame, is that we would expect it currently with no incremental material emanate to be over a billion dollars required.
spk05: Okay. And that's across all tranches, right?
spk01: Yes.
spk05: Okay. Can I ask one business question or margin question? You mentioned gross margin improvement. Part of it was driven by, you mentioned lower shipping rates. I'm assuming that's still the really high shipping rates from 22 still flowing through some of your inventory. Is that correct? And if so, when are we back to like a baseline before we have to start worrying about Red Sea and any other increase in shipping rates?
spk09: yeah so the you're right the comparison to last year in first quarter 23 was was the 22 high shipping rates still flowing through the p l in the first half of last year the whole first half of last year you know when you look at our run rate in q1 right now i think what you see is reflective of the current environment which is predominantly under contract for us through the majority of the fiscal year the red sea challenges that i talked about you'll start to see I had one from that in our P&L in most likely mostly Q3 and Q4, and as I said, it's around $10 to $12 million for the year.
spk05: Okay, great.
spk09: Thanks, Carla.
spk05: Thank you.
spk00: That concludes today's... Go ahead, Liz.
spk09: Thank you.
spk00: That will conclude today's question and answer session. I'd like to turn the call back to Joanne Chomack for closing remarks.
spk04: Thank you. And with that, we've reached the top of the hour, so we will conclude our conference call. Thank you to David and Jeremy. And on behalf of Spectrum Brands, thank you for all of your participation.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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