Spectrum Brands Holdings, Inc.

Good day and thank you for standing by. Welcome to the Spectrum Brands second 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 will 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 speaker today, Joanne Chomak, Senior Vice President of Tax and Treasury. Please go ahead.

Thank you, and welcome to Spectrum Brands Holdings Q2 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 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. 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, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated May 9, 2024, 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 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?

Hey, thank you, Joanne. Good morning, everybody. Welcome to our second quarter earnings update. I want to thank everyone for joining us this morning. I'm going to start the call today with an update on our operating performance and our strategic initiatives. Jeremy will then provide a more detailed financial and operational update, including a discussion on specific business unit results. During our last quarter's call, I shared with you that we've started a journey back to winning again. This quarter is further evidence that our operating performance from supply chain, working capital, inventory management, from our factories to our DCs and the resulting fill rates, they have materially improved over the past 18 months as we have upgraded talent across our company. Given this improved performance and the continued rhythm and cadence of our new S&OP process, we are confident in our decision to continue to invest now in our commercial operations, innovation, and sales and marketing capabilities to create and restore top-line growth and delight our consumers. Our team is leaning into the opportunities that a strong balance sheet and improving margins provides us the ability to invest back into our businesses. Our first quarter results were encouraging, but we remained cautious. Today, we are adding momentum to our journey by reporting another quarter that met our top line expectations and delivered significant gross margin and adjusted EBITDA margin growth. The playbook for winning is to consistently do what we say we're going to do and deliver on our commitments to all of our stakeholders. We are doing this by leaning into our competitive advantages to drive long-term top line growth and by being judicious on the cost side. This quarter marks one more step along this journey. I could have you turn to slide six and our financial performance. Net sales this quarter declined 1.5%. We are seeing stabilization We are seeing stabilizing consumer demand in many categories, but there are still some areas of softness compared to last year. We are pleased that our global pet care and home and personal care businesses delivered sales in line with expectations, and we're encouraged by the early seasonal sales for our home and garden business. Retailer order patterns early in the season confirm our assessment that last year's retailer inventory management actions left our retail partners with healthier and relatively lower inventory levels to start this year's season. Early orders were also helped by favorable weather in key regions and improve our confidence that our sales will be more closely aligned to point of sale this year. We're encouraged by the early start of the lawn and garden season, but we are also mindful that three quarters of our POS occurs in the second half of the year. Across all three business units now, our growth in e-commerce continues to outpace brick and mortar channels, growing at over 17% compared to last year and now representing over 20% of our net sales. Including investment income, our adjusted EBITDA was $112.3 million, up from $51 million a year ago, with strong improvement across all three business units. Our gross profit margin of 38.1% increased 870 basis points compared to last year. This quarter's results benefited from the sale of lower cost inventory compared to last year. The high cost inventory was substantially off our balance sheet by the end of the second quarter last year, so this is the last quarter we will see such a material comparable improvement. Our gross margins and bottom line are improving from the investments we've made in operational efficiencies, delivering cost savings and plant productivity improvements. We are being disciplined with our cost structures to ensure we remain lean with excess fixed costs we took out of the business in the past. Our balance sheet continues to be a competitive strength, supporting our company's growth. We are ending the quarter with a net debt position of approximately $155 million, down from almost $3 billion a year ago. Our strong balance sheet is a foundational advantage that fuels our investments back into our businesses with the goal of driving top line growth. Now if we can turn to slide seven and review the strategic priorities of our company. While our operating teams are driving efficiencies, reducing costs, and preserving working capital, the average fill rates of our company are now back in the mid-90s across all businesses with inventory levels that are approximately 45% below our peak amounts. Inventory levels in the first two quarters have been relatively flat at around a $450 million investment in spite of the seasonality of our home and garden business. This means we have $363 million less invested in inventory as compared to the high point in the third quarter of fiscal 22 and $131 million less than the second quarter of fiscal 23. These improvements all contribute to our improved gross margin structures and adjusted EBITDA by reducing the cost to come with high inventory levels and low fill rates. We're also making capital investments in our manufacturing plants and systems to drive efficiencies, reduce cost, and refocus our spend on top line driving activities. We're also investing behind our people to improve commercial capabilities and drive a culture of accountability. Our leadership and business teams are delivering on their commitments and investing back into the future growth of our company. A year ago, our second quarter adjusted EBITDA margin was 7%. Excluding investment income, our adjusted EBITDA margin this quarter is 13.3%. In fact, the global pet care business delivered a record adjusted EBITDA quarter, in part because of the very difficult decision we made a year ago to take a top line hit from rationalizing lower margin SKUs. We are now seeing the benefit of that decision in our operations, cash flow, and margin profile. Our stepped-up investments in our brands and new product roadmaps are now accelerating. We expect investments to increase throughout the rest of this year as the teams are activating their investment plans for brand marketing, advertising, and innovation. During our first quarter call, I told you we were accelerating the process to separate the HPC business via a sale, merger, or spin. This decision was driven in part by the improved performance of the underlying HPC business. HPC, in fact, had another very solid quarter, delivering or exceeding all of its key metrics. In fact, our personal care business grew high single digits and the sales declines we've been seeing in the North American home appliance business are now tempering. We are winning new listings in brick and mortar, and we're seeing material quarterly increases in our e-commerce sales. HPC's margins are improving, and the team is investing now in innovation and brand marketing again to drive profitable, top-line growth. We are also happy to announce today that we've just signed an agreement with Stanley Black & Decker, under which we will continue to license the Block & Decker brand in the same categories as before for an initial four-year term ending December 31, 2027, with two subsequent four-year renewal rights providing us with access to the Block & Decker brand name through the end of calendar 2035. This is a significant milestone for us and for the HPC business because it provides certainty for the continued use of this important brand name now for an extended period of time. With this partnership secured, our teams are now excited to get back to building this brand for long-term growth. We would like to extend our thanks to Stanley Black & Decker for their continued partnership with us. HPC's improving business results and the new Black & Decker License Agreement have reinforced our view that the time is right to separate the HPC business. During the past three months, our internal teams have been focused on separation readiness, doing all the pre-work required for transactions of this nature, and we've been working with our bankers and advisors to develop separation options. We continue to dual track the separation for either an M&A opportunity or a spinoff transaction, and we intend to file an initial registration statement over the summer to begin the SEC registration process for a spinoff. I truly believe that a separation of HPC will allow both companies pro forma. Spectrum Brands is a pure play pet and home and garden business, and a standalone appliance HPC business to flourish by focusing on the unique needs of each business. We will update you on our progress throughout the year. One additional positive note as it relates to HPC, I'm pleased to report that we have had a favorable outcome for a claim we filed under a representation and warranty insurance policy regarding the TriStar acquisition. During the quarter, we came to an agreement with the insurers to receive the full $65 million under our policy. We received the first $50 million in the second quarter, and the remaining $15 million was collected in April. Now, if I could turn your attention to slide 8 and an update on our share repurchase programs. Since the close of the HHI transaction, we have now returned over $920 million to our shareholders through our various share repurchase programs. And we have reduced our share count by approximately 29% to now 29.1 million shares outstanding. We purchased those shares at $102 million discount compared to yesterday's closing trading value. We have approximately $47 million remaining on a $200 million 10B51 share repurchase plan as of today. And as we keep delivering on our commitments, grow our earnings, and continue to shrink our share count, we believe ultimately our share price will react positively. Turning to page nine. Based on our results in the first half of the year, the trends we currently see with retailer and consumer behavior We are updating our earnings framework. We now expect full year net sales to be relatively flat to last year, and adjusted EBITDA to now grow low double digits. This framework assumes that this summer's weather is similar to what we experienced last year during the peak lawn and garden season, and that tempering sales declines in small kitchen appliances holds, and the growth that we see in personal care continues. We are encouraged by our first half results, but we remain cautious given geopolitical and macroeconomic headwinds. Consumer demand is still relatively soft, but we are seeing sequential improvements in our businesses. As we have continued our operational improvements over the past quarters, confidence in our performance is growing. Each quarter we deliver on our commitments reinforces our belief that we are on the journey to winning. Before I turn the call over to Jeremy, I would like to extend my thanks to each and every one of our global employees who are all on this journey together for their roles in contributing to our collective success. Now you'll hear more from Jeremy on the financials and additional business insights. Over to you, Jeremy.