Spectrum Brands Holdings, Inc.

Good day and thank you for standing by. Welcome to the Q2 2025 Spectrum Brand Holding 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 then hear an automated message advising that your hand is raised. To withdraw your questions, 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 first speaker today, Joanne Chomak, SVP of Corporate Tax and Treasury.

Good morning and welcome to Spectrum Brand's Holdings Q2 2025 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 .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 8th, 2025, our most recent SEC filings, and Spectrum Brands Holdings most recent annual report on Form 10K and quarterly reports on Form 10Q. We assume no obligation to update any forward-looking statements. Our statements reflect our expectations regarding tariffs, which are based on currently known and effective tariffs, and do not reflect tariffs that have been announced and delayed or other additional tariffs which could result in additional costs. 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 8K 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, thanks, Joanne, and good morning, everybody. We wanna welcome you to our second quarter earnings update. Thanks very much for joining us today. I'm gonna start the call with an update on just the global economic market situation and their impact on our company, then we'll talk about our operating performance and our strategic initiatives. I'll turn the call over to Jeremy after that, and he'll provide a lot more details on the financials and operating update, including a discussion on the specific business unit results. At this time, if I could have you turn to slide six, the world has changed dramatically since we spoke to you last quarter, but despite the volatile tariff situation and related consumer demand uncertainty, given our strong balance sheet and cash flow, our resilient team, and the brands that we have that are important to our retail customers and consumers, I'm actually encouraged by the opportunities I see ahead for our company after we navigate this new tariff environment. When we spoke a couple months ago, three months ago exactly, a 10% tariff on Chinese goods had just been announced. Tariffs on goods from Canada and Mexico had also been announced, and there were no other reciprocal tariffs in place. For perspective, about 20% of our global COGS is sourced from China for the US market, and we have negligible sourcing from Canada and Mexico. So at that point, our expectation was that we would offset the fiscal 25 impact of that first round of tariffs within our earnings framework. This is not the first time we as a company or spectrum brands have faced tariffs nor inflation headwinds, and the teams were already in action running our playbook. We had notified our suppliers that we were expecting price concessions, we notified our retail partners of price increases, and we were looking for internal cost improvements to cover any leftover costs. We were also accelerating plans to move our supply base out of China, prioritizing the SKUs that were facing the highest tariffs. We spoke to you about consumer sentiment and certain of our categories weakening as the consumers digest the new international trade environment and the implication it has on prices and inflation. At this point, the game has changed. With the incremental 125% Chinese tariff, and our Chinese source goods subject to a tariff of at least 145%, and in some cases up to 170%, we've determined there's no way or no playbook that we can realistically use to cover these incremental costs and continue to source product from China. And one of my mantras is that you need to control what you can control. At this point, these are no longer tariffs. They are simply a barrier to trade, in our opinion, completely unsustainable. As such, we made the tough decision to pause virtually all finished purchase goods from China until the tariff levels decline to an amount where we can maintain our profitability and margins. And we are currently selling our Chinese source products that are already in our inventory and that were already on the water. Our teams are, again, hard at work, focusing on expediting the move out of China. Our sourcing, new product development, and commercial teams are finding new supply outside of China as we speak, and navigating through disruption during the transition time. Supply change, supply chain changes require time, not only to find the new supplier, but to also go through all the necessary quality checks to ensure we are selling product that meets our high standards. The good news here, and the good takeaway here, is that the transition of our global pet care and our home and garden business will be very quick. GPC, or our pet business, has already diversified its global sourcing footprint with major suppliers outside of China, including Vietnam and Cambodia, where we can shift our Chinese product. We are also now sourcing products out of Thailand. As another positive development, we have a brand new manufacturing facility from one of our vendors opening in Mexico next month to supply our pet business. By the end of the fiscal year, we expect to have sourcing alternatives outside of China for the US market for all but about $20 million of our total GPC purchases. This is a phenomenal accomplishment, and I'm very grateful to the supply chain teams, sourcing teams. Home and Garden only sources a small portion of its products from China, and the team has already identified alternative vendors for most of that product, and expects to be virtually out of China by the end of this fiscal year. We see a relatively small negligible impact to Home and Garden season, and we expect to be ready for next year. Clearly, the home and personal care appliance business is the most challenged business we have. About 40% of HPC's global purchases come into the US, and nearly all of those were previously Chinese sourced. We already accelerated the move of production for US-bound products out of China last year when the Section 301 tariff exemption expired. That resulted in a 25% tariff on some of our products. Those lines are now already outside of China, and we are expediting the process to move the rest of our US-bound products out of China also. We are working with established vendors to manufacturing countries such as Indonesia, Vietnam, and Thailand, and we have scenario planning in place to navigate the tariff environments, ensuring that we'll maintain very agile and prepared. In fact, we expect by the end of this fiscal year, just six months from now, we'll be able to supply approximately 35% of HPC's current US volume from non-Chinese sources, with that number climbing to the mid-40s by the end of this calendar year. There are some skews that we may not want to move because they're either underperforming, too small, add complexity to our organization, so the cost and complication of investing and moving them might not make sense. Realistically, even with the expedited process and the likely SKU rationalization, we expect it will take until at least the end of fiscal 26, potentially into fiscal 27, to have sufficient supply outside of China to fill HPC's US demand at current levels. Fortunately, and this is the good news, HPC is a global business, and 80% of our profits in this appliance business are generated outside the United States. In the meantime, our teams are still focused on all three levers to address profitability. We are negotiating with our vendors to absorb as much of these costs as possible. We are currently collaborating with all of our retail partners on pricing adjustments to address the higher cost of supplying from outside of China and the reciprocal tariffs in those countries of origin. Our teams are meeting with retailers, coordinating on supply plans and product availability. Many of these retailers supply their own private-label products from China, so they are very familiar with the challenges of moving supply. We are conducting comprehensive and regular reviews of our operating expenses and curtailing discretionary spend to protect the business moving forward. We have adjusted our expected investment spend to support the business and to reflect the state of the consumer. While we will definitely continue our brand-focused investments across all the businesses, some of the marketing and advertising spend we were planning for our HPC appliance business has been paused during this transition period. We will adjust our mitigation plans as needed, and we will remain agile and responsive as possible. With all of that said, I must tell you, we are very well positioned to weather these current economic times. We closed this quarter with net leverage of just 1.7 turns, and we expect our leverage to actually come down by year-end because we are going to generate significant free cash flow in the second half of this year. We have one of the strongest balance sheets and lowest leverage positions in our entire peer group, and we expect our stable financial position to be a very competitive advantage as we secure new partnerships with vendors and suppliers outside of China. These suppliers will be in high demand, and some will be able to choose which U.S. companies they want to supply. We believe that they will want to partner with a company that is financially strong, and we will make it through these tough economic times and come out stronger when the economy stabilizes. Let me be very clear on this point. We have and will continue to prioritize maintaining ample liquidity and our strong balance sheet. We are simply not willing to sacrifice our balance sheet to chase short-term earnings or revenue in this volatile cost environment. We're going to be disciplined about the inventory we buy, and we will continuously reassess the cost and demand environment in making any decision that impacts our cash flow and balance sheet. Our operations are performing as strong as ever. We have a -in-class operations team that we've built over the last couple of years, and it handles every twist and turn that comes at them with complete confidence and agility. Our supply teams and planning improvements, S&OP process, are truly one of the core of our successes today. The team has driven record fill rates and service levels, further strengthening our retailer partnerships, and ensuring we stay lean on inventory. These results are a direct reflection of our supply chain leadership, the supply chain investments and development work the team has embarked on over the last few years, and I want to personally thank this team again for their dedication to do the hard work and get the results. Okay, if we could now turn over to page seven, we're going to talk on our Q2 numbers, second quarter results. In the second quarter, our net sales decreased 6 percent or excluding unfavorable FX, our organic net sales decreased just 4.6 percent. This was a challenging quarter for our top line, and our expectations for the quarter were higher than results that we ultimately delivered. Jeremy will go into specifics on each business unit, but we generally saw deteriorating and softer than expected U.S. consumer sentiment over the course of the quarter, and that impacted category growth. U.S. consumers are looking for value as they digest and react to the economic news and the volatility in the marketplace. As the quarter ended, we saw some deterioration in consumer sentiment in EMEA. Home and Garden had a good quarter, and we are looking forward to what we hope will be a solid season for that business. Retailers continue to pre-bill for the season, and we're now ready for the weather to warm up to drive consumer POS and replenishment reorders. We're excited about the innovation pipeline for Home and Garden, where we are introducing a number of new products this season to continue the momentum from last year's Spectra-side one-shot launch. Our adjusted EBITDA in Q2 was $71.3 million, which is a decline of $24 million compared to last year's results, excluding investment income. Our gross margins decreased 60 basis points over the second quarter of fiscal 24. This quarter, we saw consumer confidence weakening and tariff volatility increasing, so we initiated cost-saving measures that will save approximately $10 million annually. Our businesses were diligent in delivering these cost improvements and operating efficiencies to offset headwinds from inflation and incremental tariffs from last year's exploration of tariff exemptions. Especially during these times of unprecedented uncertainty, staying lean is imperative. And we are committed to refocusing our spend to our top-line driving investments. In fact, this quarter, we increased our brand-focused investments by $3 million as compared to the period last year. We could now turn over to slide 8, please. I'd like to update you all now on our strategic priorities for fiscal 25. We have updated our priorities to reflect the new tariff landscape and softening consumer demand environment. We are focused on protecting our balance sheet and running the business for free cash flow generation for the remainder of fiscal 25. As I have said, we will continue to prioritize maintaining ample liquidity and a strong balance sheet. We will not sacrifice the balance sheet for short-term earnings or to chase revenue in these volatile cost environments. To that end, we are targeting free cash flow for the year of approximately $160 million, or $6 to $7 per share in free cash flow. We are utilizing our supply chain capabilities to focus on transitioning China-sourced products to other sources of supply. As we move our supply out of China, our teams will ensure that our cost basis is the best in class. We have high-quality products, and our safety standards are not going to be compromised. We're focused on cost reduction efforts, including strategically pulling back on some advertising and marketing investments in the short term. Jeremy will share with you some of the highlights of the new innovation we're introducing this year, where we are seeing the increased investments we make in new product innovation start to pay off. We will continue to invest in NPD and new product innovation to drive future top-line growth. We're also preparing our businesses to emerge from this economic uncertainty as a growing, stronger company that will be the partner of choice for M&A activity with a strong balance sheet and an optimized cost structure. Our investments in innovation are expanding our core categories and driving sales and new adjacencies. We believe the strength of our balance sheet puts us in a very unique position to capitalize on the dislocation in our industry and to become the strategic partner of choice, particularly among private equity-held companies. With asset prices resetting, we believe we are in an ideal position to strengthen our portfolio with accretive acquisitions in pet categories. We have a strong track record of growing our acquired pet brands. Our goal is to leverage the platform we have and the team we have built to expand into an even more sustainable, consumable pet category company. To help us accomplish this goal, we have brought in a new leader for our global pet division. Ori Ben Shai. Ori is a seasoned GPC executive having led many multi-billion dollar CPG platforms, most recently at Kimberly Clark. Ori and I share the common vision of doubling and even tripling the size of our pet asset by expansion both organically and through acquisition into areas such as niche food and treats, the health and wellness segment of the pet care market, in addition to gaining more exposure to the ever-growing cat segment. We believe that we can position the portfolio more towards power-branded, faster-turning consumables while adding scale. We also believe that we can become the consolidator of choice in this space but can also end up lifting the multiple of the business longer term. The strategic transaction for HPC continues to be delayed by the current tariff landscape and geopolitical factors that are beyond our control. While HPC is expediting plans to move its U.S. supply base out of China, reduce costs, and streamline its business, we now believe it is unlikely we will find a mutually agreeable M&A transaction by the end of this fiscal year. It is also not feasible to spend the money to extend the business off to shareholders, given the fact that it's currently facing the type of tariff and economic headwinds that exist today. So until there's clarity on tariffs or we have secured supply chain outside of high tariff countries, we expect to continue to hold and operate the HPC business. While we are disappointed in the delay in this transaction, Spectrum Brands and Spectrum becoming a pure-play pet and home and garden company, we do believe the HPC business will continue to be, and we believe in the HPC business, and we will continue to be good stewards of it. We have not called off the transaction permanently, however, and in fact, we will continue to seek opportunities to maximize its value. I believe, given the current financial situations of many of the players in this space, that I'm actually optimistic that this situation can accelerate the need for strategic combinations in the appliance base and provide us the opportunity to complete a separation in a more beneficial manner. But this will take some time. Now turning to slide nine, I want to give you an update on share repurchases. During the second quarter, we repurchased approximately two million shares of our common stock, and we have continued to buy during our pre-earnings quiet period through a $50 million 10B5.1 plan that we put in place in March. Year to date through today, we have purchased approximately 3.2 million shares for $260 million, and in total, since the close of the HHI transaction through today, we have returned over $1.28 billion of capital to our shareholders through various share repurchase programs, and we have repurchased almost 40% of our share count since the closing of that transaction. We still have approximately 140 million remaining on the share repurchase authorization, and we are being disciplined with our share repurchases to preserve the strong balance sheet we have and the strength of our liquidity during these challenging economic times. With net leverage still well below our long-term target of two to two and a half turns, we have the financial capacity to continue to fund investments into our company, fund growth, and continue to return capital to shareholders and pursue acquisitions. Turning to page 10. Given the unprecedented global tariff conditions and the unpredictable nature of global trade negotiations and the softening of US and European consumer demand, at this time, we do not believe we have sufficient visibility to continue providing an earnings framework for fiscal 25. When US tariffs on Chinese goods escalated in early April, we pivoted our operating model to run our business to maximize free cash flow for the balance sheet of this year and not to chase sales or gap earnings in this current environment. To that point, we expect to deliver $6 to $7 per share of free cash flow this fiscal year. Now, before I turn the call over to Jeremy, I want to thank each and every one of our global employees who are pulling together right now as a team, relying on our strengths and leaning into solutions and solutioning these transitions to come out on the other side in an even stronger company. Now, I'm going to turn the call to Jeremy. You're going to hear more from him on the financials and you'll get a lot more business unit insights. Over to you, Jeremy.

Thanks, David. Good morning, everyone. Let's turn to slide 12 in a review of Q2 results from continuing operations, starting with net sales. Net sales decreased 6 percent and excluding the impact of $10.1 million of unfavorable foreign exchange, organic net sales decreased 4.6 percent, primarily due to category softness in the North American market for both our global pet care and home and personal care businesses, as well as retailer inventory build timing in home and garden, where you may recall in Q1, we saw a significant pull forward of orders by certain retailers. Gross profit decreased $20 million and gross margins of 37.5 percent decreased 60 basis points. Largely driven by lower volume, higher trade promotions, unfavorable mix, inflation, and higher tariffs from last year's expiration of exemptions on certain products lines, partially offset by impacts from cost improvement actions and operational efficiencies. Operating expenses of $233.9 million increased 18.4 percent due to a settlement received last year under a representation and warranty insurance policy related to the TriStar acquisition, an increased investment spend in advertising and marketing, partially offset by reduced trade name impairments and general expense management. Operating income of $19.5 million decreased by $56 million, driven by the gross margin decline and higher operating expenses I mentioned. Gap net income and diluted earnings per share both decreased, primarily driven by the lower operating income and lower investment income, partially offset by lower interest expense and the lower share count. Adjusted EBITDA was $71.3 million, a decrease of $41 million, driven by investment income of $17 million in the prior year, lower volume, reduced gross margins, and increased brand-focused investments. Excluding the prior year investment income, adjusted EBITDA declined $24 million. Adjusted diluted EPS decreased to $0.68, driven by lower adjusted EBITDA, partially offset by lower interest expense and the reduction in shares outstanding. Turning to slide 13, Q2 interest expense from continuing operations of $7.5 million decreased $9.4 million due to our lower outstanding debt balance. Cash taxes during the quarter of $23.9 million increased $9.5 million from the prior year. Depreciation and amortization of $24.5 million decreased approximately $1 million from last year. Separately, share-based compensation increased $700,000 to $5.2 million from $4.5 million last year. Capital expenditures were $9.2 million in the quarter, $3.3 million lower than last year. Cash payments toward strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments were $6.4 million versus $6.6 million last year. Moving to the balance sheet, we had a quarter-end cash balance of $96 million and $408.6 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $657 million consisting of borrowings on our cash flow revolver of $83 million, $496 million of senior unsecured notes, and $77.8 million of finance leases. We ended the quarter with $560.9 million of net debt. Now let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results. I will start with global pet care, which is on slide 14. Reported net sales decreased 7.1 percent, and excluding unfavorable foreign currency impacts, organic sales decreased 6.3 percent. Sales declined in both the companion animal and aquatic categories. In companion animal, organic sales were down mid-single digits. North American companion animal sales declined low double digits with softness across all sales channels. North American sales in our categories declined, but we generally either held our share, which we did in choose and treats, our largest category, or we grew our share like in stain and odor. The North American consumer environment grew increasingly cautious throughout the quarter. Especially within the premium segments of our companion animal portfolio. Consumers continue to look for value through smaller pack sizes and lower cost options. In reaction, we expanded targeted price reductions on some of our largest selling skews to narrow the differential with private label, and we invested in consumer engagement and conversion online. These actions were generally successful in stabilizing consumer demand for our premium products. Quarterly e-commerce sales were affected by de-stocking in the early part of the quarter. Order patterns returned to more normalized levels by the end of the quarter in line with our double digit POS growth there, and we expect these normalized order patterns to continue in the second half of the year. EMEA organic sales grew mid-single digits. Our Good Boy brand had strong sales this quarter across the region as the team focuses on expanding distribution into continental Europe. In aquatics, organic sales declined mid-single digits compared to last year. The consumer demand environment for both nutrition and hard goods continue to be soft this quarter. Sales declined in each region, with North America offsetting some of the category decline with share gains and distribution wins in pet specialty. Our investments in brand-focused innovation, marketing, and advertising are positioning us for future top-line growth. In North America, our Good and Fun national ad campaign is driving brand awareness and expanding our distribution channels. We are excited to announce the Good and Fun brand is the first ever halftime sponsor of WNBA games on CBS. Throughout the season, which begins in mid-May, we will have branded graphics during halftime reports, in-game teasers, and custom on-air features. Our Good and Tasty and Meowie cat treats are gaining momentum. We recently had successful launches in pet specialty and are seeing rapid distribution expansion within the grocery and dollar channels and online. We are on track for the North American launch of a high-nutrition wet dog food line by the end of the year. Following our strategy of first launching the innovation online to gain consumer insight and reviews, and then later in brick and mortar. We are also focused on high-nutrition food in EMEA, where we are launching IMEs, senior cat, and sensitive dog digestion products. Our Dreambone collagen and high-protein dog treats are hitting stores this quarter. We recently launched a new delivery system for Nature's Miracle, featuring our patented -and-go technology to enhance user convenience and drive consumer engagement. And we are gearing up for a launch under our Furminator brand with a new program specifically targeted at doodles. In aquatics, we unveiled a new electric green angelfish, glowfish, at the Global Pet Expo, building on the successful introduction of our first angelfish species under the glowfish brand last year. Adjusted EBITDA of $50 million was $12.3 million lower than last year, primarily driven by lower sales volumes, inflation, incremental trade promotions, an unfavorable mix, offset by operational productivity improvements and other favorable variances. GPC also increased its brand-building investments this quarter, continuing to invest behind strategies to drive both short- and long-term sales growth for the business. Looking out, we do expect continued cautious consumer behavior, and given the premium placement of many of our brands, we anticipate continued pressure in North America from consumer trade-downs in this difficult and strained consumer environment. We remain cautious about aquatics, where demand continues to be soft and has not yet returned to pre-pandemic levels. Moving now to Home and Garden, which is on slide 15, net sales decreased .2% in the second quarter, as expected, due to timing shifts into our first quarter, where we grew 28%. Phasing of seasonal pre-builds by our largest retail customers was the largest driver of the sales decline this quarter. Retailers continue to build inventory before the start of seasonal consumer demands, in an effort to win the first consumer purchases of the season, but as expected, we gave back some of our Q1 over-delivery in the second quarter. Most of our sales in the first half of the year are retailer pre-builds to prepare and stage for consumer demand in the seasonal business, which for us starts in full in Q3. This quarter's sales were also negatively impacted by $4-5 million of sales that were pulled into Q1 in advance of H&G's Go Live on our S4HANA ERP. With these moving pieces between the quarters, we do think it is helpful to understand that first half net sales increased 5%, or $11.7 million over last year. Sales increased in the household pest and repellent categories this quarter, but were lower in controls and cleaning. After an especially strong Q1, sales and controls were down mid-double digits. Repellent sales increased mid-double digits and household pest sales increased high single digits. POS for our household pest was strong this quarter. Looking at the first half of the year, sales increased in each of our categories other than cleaning, where sales comparisons continue to be affected by the loss of some distribution last year. This is the second season for our Spectracide One-Shot product line, our higher performance longest lasting Spectracide product. Pre-build orders for this product have been consistent with expectations and in partnership with our key accounts, we are executing strong on and off-shelf support, which is starting to gain momentum in the market. This year, we launched a new Spectracide Wasp, Hornet, and Yellowjacket trap that has gained high interest and support from all of our key accounts. Early POS reads on this innovation are well above expectations. In our Hot Shot brand, we launched a new Flying Insect trap, our first launch into this segment. In line with our brand strategy, this innovation offers strong benefits and significant value to consumers. We are thrilled that this product was voted as product of the year for best in pest control. At a value price point to competitive products, the Flying Insect trap provides continuous action to attract and capture house flies and fruit flies with a discreet compact design that blends seamlessly into your home with no setup or electricity required. Adjusted EBITDA was $26.7 million compared to $29.2 million last year. The decrease in adjusted EBITDA was driven by lower volumes due to the quarterly timing of sales, incremental brand building investments, negative mix, and inflation offset primarily by cost improvements. We continue to expect this season's weather to generally be similar to the 2024 season, which we characterize as an overall good season. As anticipated, our seasonal POS is starting later than last year because of a slower warmup in key regions. And as a reminder, typically 75% of our POS is in the second half of the year. Our retail partners are prioritizing the lawn and garden category in their stores this season with the allocation of off-shelf space. Repunishment orders will be driven by levels of consumer demand within the season, which are dependent on the weather and overall consumer sentiment. We expect the category to be competitive and we will continue supporting our innovation and brands through brand-focused investments throughout the year. And finally, home and personal care, which is slide 16. Reported net sales decreased 5.1%. And excluding unfavorable foreign exchange, organic net sales decreased 2.2%. Sales in both the personal care and home appliance businesses were down mid-single digits this quarter, driven predominantly by softness in North America. Continuing recent quarterly trends, HPC's e-commerce sales growth significantly outpaced brick and mortar sales. In the current quarter, organic net sales and EMEA were relatively flat with mid-single digit growth in personal care offset by mid-single digit declines in home appliances. High inventory levels at certain retailers impacted quarterly reorder patterns for both categories. Inventory levels are stabilizing and we expect preorder patterns to return to normal before the end of the year. We have recently seen some of the larger European grocery retailers descale their focus on non-grocery items within their stores, negatively affecting our sales to those retailers. European consumer competence has recently become more cautious in the current geopolitical environment. But in spite of that, we generally saw growth in hair care sales across the region while sales in cooking and garment care were lower. North American sales decreased high single digits with declines in both personal care and home appliances. Each business saw reduced North American category demand this quarter compared to last year as consumer competence levels impacted overall category sales. Sales for certain skews were also lower as we actively managed their transition out of China based sourcing. Quarterly sales were also negatively impacted by the bankruptcy of a North American retailer. In the first quarter, we discussed how we had seen a slowdown in order patterns at a large e-commerce retailer. While reorder patterns generally returned by the end of the quarter, the timing of this change had a negative impact on quarterly sales. Organic net sales in Latin America grew low double digits with strong growth in both categories from distribution wins and strong new product launches in Colombia and Mexico. Our investments in innovation, marketing, and advertising at HPC are delivering results. Building on the commercial success of our Emerald French store air fryer, we introduced a new French store air fryer that comes with a pizza stone and further reinforces the function versus utility and value of air fryers in modern kitchens. We are now selling on TikTok Shop UK continuing our omni-channel strategy of selling our product wherever our consumers are buying. We launched a line of Russell Hobbs floor care products in APAC. Our Remington Balder continues to win accolades in the market having recently been awarded the best hair shaver by GQ magazine. And we recently introduced the new Remington Botanicals line at Walmart. We will lean into our Manchester United sponsorship to launch a new hair care line in EMEA and our Latin American team hosted a regional Remington customer event to build on the regional brand strength and positioning of Remington. This quarter's adjusted EBITDA was $7.3 million compared to $17.8 million in the prior year. The adjusted EBITDA margin was .9% compared to .6% last year. The decline in adjusted EBITDA was driven by lower volumes, higher trade promotions, unfavorable mix, incremental tariffs from last year's exemption, expiration, and inflation offset by continued cost improvement initiatives, lower brand focused investments, and foreign exchange. Our focus in the second half of the year in HPC will be to drive sales and international markets while we sell remaining inventory in the U.S. and maximize cash flow. We are actively managing our costs and accelerating our plans to exit Chinese sourcing for the U.S. market. We currently expect to have alternative country sourcing for approximately 35% of our products by the end of the fiscal year doubling during fiscal 2026 to approximately 70%. Turning now to slide 17, as David said, given the unprecedented global tariff situation, the unpredictable nature of global trade negotiations, and the softening of U.S. and European consumer demand, at this time we do not have sufficient visibility to continue providing an earnings framework for fiscal 25. However, we are expecting to generate approximately $160 million of free cash flow for the year actively managing our spend and our working capital. To end my section, I want to echo David and thank all of our global employees for their hard work in these challenging times.

Now back to David. Hey, thanks, Jeremy, and thanks, everybody, again, for joining us on the call today. Look, let's take a couple of minutes now. Let's just recap some of the takeaways. You can find those on slide 19, I think. Look, a couple years ago, we set out to transform this company, and we did it through divestitures of certain operational assets, and we had a couple of goals. The first goal was we wanted to materially deliver the balance sheet, and we achieved that goal in fiscal 23, and we repaid $5 billion of debt in the last seven years. This has been a remarkable accomplishment, and while we didn't see this current environment happening, thank God we took this step and we have this incredibly strong balance sheet today. The second thing we wanted to do was we wanted to fix our operations, and we went out and we hired new talent. We implemented -in-class S&OP processes, and this is at the core of our operational strategy now. We have among some of the best working capital management and fill rates in our industry today, and that's just a remarkable achievement, given where we were just three years ago. Our supply chain teams are uniquely situated now to strategically anticipate and quickly react to macroeconomic developments such as the ones we face today. Thirdly, we wanted to return our company to a growth profile, and we increased our investments in innovation, advertising, and marketing, and in fact, we did return to top line and bottom line growth last year, fiscal 2024, and we brought new leadership into the organization with a growth mindset to take our company to the next level. The last thing I wanted to do, the last thing we wanted to do strategically as a board and me personally, fourth, we wanted to resume growth through accretive acquisitions in pet and home and garden. Until now, we've been frustrated with the high multiple expectations for both complementary and adjacent assets. However, as I mentioned earlier, there's a silver lining to this current macro situation. We're seeing assets that are attractive to us, and they're becoming available at better prices. As such, we see M&A as more likely going forward. We have a lot to be proud of. We have 3,000 global employees who are all pulling together to thrive during these volatile times. Over the past several years, our teams have successfully navigated through tariffs, an unprecedented pandemic demand surge and supply chain disruption, record inflation, and then the post-pandemic demand inventory corrections. Our teams have come out stronger because of these challenges, because they've faced them together. I'm extremely proud of our operating teams. We know that our brands matter to our retailers and consumers worldwide. And as we have talked about in prior economically challenging times, some of our brands can actually perform better when consumers are constrained. We know our business, we know our retailers, we know our customers. We believe in our brands and our teams. It is an understatement to say that today we're operating in unprecedented times. But we are quite confident in our ability to succeed. For GPC and Home and Garden, the tariff-related challenges will be resolved in just the next few quarters. GPC is moving quickly and redirecting spend within its already broad global supply chain footprint to -Chinese-based supply. Home and Garden season will be largely unaffected by the tariffs. HPC has the largest hill to climb because of where it's starting, but our teams are keenly focused on accelerating the plans we had in place to secure supply outside of China for our U.S. marketplace. And our HPC global supply chain team was in Southeast Asia just a few weeks ago meeting with our new suppliers and touring new production facilities that are being built, in some cases specifically for us and for our HPC business. These are suppliers we have long-term relationships with and who are following the HPC business out of China. We are partnering with them to develop transition plans, get the supply going, and that'll take time, but the team is working the playbook, controlling what they can control, being strategic, and leaning into our competitive advantages. We anticipate, and this is important, we anticipate having 100 percent of our Home and Garden business and all but $20 million of our global PECCA business sourced completely out of China by the end of the calendar year. That's remarkable. Again, hats off to the supply chain team. While our U.S. appliance business is currently being impacted by tariffs, we aim to have approximately 45 percent of the supply out of China by the end of just this calendar year. And with over 80 percent of our HPC earnings coming from our European and rest of world appliance businesses, we are very well positioned to weather this current tariff storm and emerge a stronger player in the space. There are a lot of competitors in the space that cannot make that statement. We also believe this will accelerate the pace of consolidation in the industry, and it's going to give us the opportunity to revisit a merger, spinoff, or separation of the business unit at some point. We have a very strong balance sheet and cash flow profile. We have one of the lowest leverage ratios in the pair group. Even this year, in the face of these economic times, our teams are driving continuous working capital improvements. We're simply not going to sacrifice the strong balance sheet for short-term gains. Our balance sheet is a competitive advantage, and we will fiercely protect it because we see opportunities coming our way. With a strong balance sheet and robust liquidity profile and a lot of capital available to us, we are really excited about the opportunities, actually, that this macroeconomic condition is likely to bring us. We remain highly focused on building out our patent home and garden businesses both organically and through acquisitions. And while there will clearly be volatility over the next six months, we estimate that we can generate $6 to $7 of free cash flow per share this year. I am confident we will get through the near-term volatility and emerge a stronger, more focused competitor, and I'm actually excited about the opportunities these times will bring us, in spite of the short-term volatility. We will remain focused on what we can control. We will be nimble, and we will protect our house. The future is bright for spectrum brands. At this time, let me turn the call back over to Joanne, and we'll take your questions.

Joanne Lipps Thank you, David. Operator, we can go to the question queue now.

Operator Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We do ask that you limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from Bob Labick with CJS Security. Your line is open.

Pete Lucas Hi, good morning. It's Pete Lucas. Actually, it's Pete Lucas this morning for Bob.

How

are you doing? Peter Good. You guys covered a lot in the prepared remarks. Thank you. You crossed off a lot of my questions here. But just wanted to see, I guess in terms of from a sourcing perspective, any areas where you see yourself competitively advantaged versus your peers given the new landscape or kind of think of it as everybody in the same boat?

Bob I'll let Jeremy take the details, but just real brief. I mean, listen, what we're trying to say to everybody today is it's going to be a little choppy given the tariff situation over the next six months. But I'm thrilled to be able to talk to you today and say, look, HPC is going to have no China source exposure in six months. We'll be down to less than $20 million coming out of the pet business. And so our appliance business US is the one that needs the help. And we're going to have that ramped up pretty aggressively by the end of the year. So the fact that we get 80% of the appliance profits internationally is just that is a competitive advantage to us as you talk about. And if the one and just so everyone knows, we price this based on a worst case scenario. So we're assuming the $145 to $170 out of China stays. Obviously, I view that as completely unsustainable. So maybe there's some good news in the future. But we wanted to give you kind of where we, you know, what we're having to deal with today and show you that we're prepared to tackle it and actually come out better for it. But look, on the front end of these things, Pete, you're always dealing with solving the problem. On the back end, you're not wrong. I told that to the team. You always find silver linings on the back end. But I can't tell you who's going to go bust and who's not to be able to stock the shelf. And then they're going to call me and they're going to need a toaster oven or a coffee maker. I don't know that yet. But you got to believe that's coming. And like I said, too, I really believe it's going to bring strategic opportunity. That'll take a little bit longer. But we're just fantastically positioned to deal with this. Jeremy, I don't know if you want to talk about it. Yeah, the only

thing I would add is one, I started kind of the opposite way. You asked the question, Pete, and I'll come back to this. One, the good news is the playing field is level, I think, for everybody. We're not disadvantaged anywhere. Where I do think we're advantaged is, quite frankly, our scale. So if you think about some of our larger brands, Black and Decker is a $400 million brand. Good and Fun is over a $250 million brand. That's significant volume for factories that are being set up or expanded outside of China. And I do think that, as David said in prepared remarks, we'll likely be at the front of the line as it relates to getting that volume more quickly.

Extremely helpful. Thanks. I'll jump back in the queue.

Thanks, Pete. Have a good day.

Thank you.

Our next question is from Peter Grom with UBS. Your line is open.

Thanks, operator. Good morning, guys. Good morning, Pete. Jeremy, I appreciate all the color on the tariffs. And I know there's a lot of moving pieces. But just as we think about the model, is there any way to frame what the gross impacts could be? And then maybe as you think about the kind of mitigation actions, what that figure could be on a net basis?

Yeah. And I don't think there's any way to give absolute numbers on it because we are, as we talked about, we pivoted our operating strategy. And so we've talked with everybody, Peter, as you know, of sourcing roughly $300 million of finished product with about $100 million as we started the year for PET out of China for the US market and roughly $200 million for HPC. So you can do rough math and say without changing your operating model, what would that gross impact look like? But in reality, as David said, we've stopped ordering from China immediately. We haven't ordered anything for five weeks. So that's not a reality for us. So I think you really have to go business by business as we did in our prepared remarks and say, look, home and garden, we really don't expect an impact. There will be some impact as we get to the later part of the year on a gross basis, but we are going to price for it. And we don't expect really much of a net impact even this year. But for PET and HPC, it's something different. If this tariff stays in place at 145% to 100%, 170%, we won't have product to sell all the demand in the US market in Q4. Neither will our retail customers and neither will most of our competitors. So that's where it's very difficult in the short term to talk about the net impact. In addition to that, we are seeing signs of consumers in the US especially and now starting in Europe to pull back given all this uncertainty. That's another reason why I'm very hesitant to give you a short-term net number because I just don't think it's appropriate given the uncertainties. But hopefully that level of color helps. The other thing I would say is I know it's difficult for everybody to buy on sell side when companies withdraw their guidance. So just give a little bit of color since we're on the public call. As we sit here today, I don't expect a lot to change in our operations sequentially from Q2 to Q3. So I would expect Q3 to look relatively similar to Q2 with the seasonal ramp up in H&G. The big question comes in Q4 around how much demand is there out there, how much product do we have, what happens on retail shelves as products start to dwindle in the US market. And that's what we'll have to watch more closely. But as David said, I think we are well positioned. We're super encouraged by where we're going to be with H&G and GPC just at the end of the fiscal year. And so I think the impact moderates very quickly as we ramp up 26. And HPC, not just for us, but for the entire category and for all the US consumers, it's going to be fascinating to watch what happens at this level of tariffs.

Yeah, I mean, Peter, just to close it out, we're trying to give you full color. So just a couple of months ago, we had 100 million bucks of exposure in our pet business. We've got that down to 75. And we'll be down to less than 20 million or less in six months. Really mitigating any impact to pet very quickly. Home and garden, we have small exposure, but we're going to price for what we can't get out of there now. We're going to be out and have no exposure to China entering fiscal 26. So really what we're trying to say, we're trying to keep the earnings power of our two bigger businesses, home and garden and pet, intact so we can enter into 26, get back to growth and have a really nice year in 26. HPC, the way I'm mitigating that tariff that Jeremy talked about is I'm just not buying for the US market. And until the administration changes its stance or we have supply outside of China, we're going to liquidate the US piece. But the beauty is I'm making 80% of the profits of that business outside of the states. And that's what we're trying to be very clear on today.

No, that's really helpful, guys. And then David, just a follow up for you on just kind of the M&A commentary and you touched on it, asset prices resetting, you're in a place to capitalize on that dislocation. I'm just curious, is this kind of a shift in capital allocation priorities? And I ask that in the sense that you in prior quarters, there just seems to be a view that the stock was undervalued and that buying back stock was kind of the best use of capital. So just curious if this commentary suggests a pivot.

Hey, thanks for the question. Look, we're buying the stock as we sit here talking today. The stock's cheap, it's undervalued. I mean, it just is. Look, I want to protect the balance sheet because I think the balance sheet and the liquidity profile is going to afford us amazing opportunities. My personal view, you know, we just hired Ori to come in as the new president of PET. If you know, just like we converted the PET asset from being mainly an aquatics business to a companion animal treat business, if we can now take that to the second derivative and make it, you know, we have IAMS of Canuba in Europe. We're launching food here in the States. We don't have big food presence. If we could add a food presence in a niche market so we're not competing with the big boys, if we could get into CAT in a bigger way, if we get into PET Health and Wellness and become more powerful, like, you know, Good and Fund, it's a powerful brand, right? It was 50 million bucks when we bought it. We're doing 260 million with it now. We need big, powerful brands, but we need more consumption. And so if we can become the anchor to the basket, have food in there, and really build an amazing food business on our PET Supply platform, that's not only going to give amazing growth and synergy and the rest of it, it's going to lift the multiple of that business. And so that's just enough. That's a very attractive avenue for us as shareholders to make a lot of money over the next three to five years. And that's we've looked at tons of deals there, too, just to be open. And we passed on it. We're going to be disciplined. We're just we're not going to overpay for

assets.

Super helpful, David. Thank you so much. I'll pass it on.

Thanks, Peter.

Thank you. Our next question is from Olivia Tong with Raymond James. Your line is open.

Great. Thank you. You mentioned that for some products, you're either staying in China or exiting the U.S. business. Can you talk about what percent of your sales are in these products? And then for the production that's moving out of China, are you working with new suppliers that you'll have to onboard and bring up to speed or the same ones that are just moving their operations? And since you're still hoping for an exit of HPC longer term, how do you think about sort of your willingness to invest significant time effort to find alternative sourcing for for much of that business? Thank you.

Morning, Olivia. I'll do it in reverse order. And I had a little trouble on your first question. So if I get it wrong, please restate it. On HPC, look, we have a strong management team in that business. We have it integrated with our corporate enabling functions, including supply chain and sourcing. And we have the desire, the energy, the capability to tackle this problem inside our four walls. And we'll certainly do that. We will deploy some capital for tooling in new factories, but it's nominal compared to benefit that it will bring us. And so we are definitely committed to doing that and riding the ship for the business as it relates to the US market. And thankfully, as David said, 80 percent of the profits are outside of the US. So we will do that. What we're not focused in is acquisitions in that space. Second question. Sorry, bear with me. So the second question was.

What percent of your sales are in the products that you said that you're either exiting or staying in China? And are you working with new suppliers?

Yeah. So on the second one there. So I would say that there are some new suppliers, but the vast, vast majority are existing suppliers who already have presence in other countries in Asia and some even in Mexico. And some are setting up actually new factories that have already been in process before this tariff situation evolved. So there's not a lot of ramp up with brand new suppliers, though there is a lot of quality work that has to happen in new factories or factories that are expanding outside of China. As it relates to the product that we referenced that may not move, what I would say is that's probably as we sit here today, and this is going to change because we're just a few weeks into this, but it's probably 15 to 20 percent or so of the HPC US related products as we sit here today, we're putting those lower at the bottom of the list. Margins are lower, they're smaller SKUs with less revenue impact, not as impactful as the ones we're prioritizing. So that's really it.

Got it. If I could follow up on free cash flow, can we talk about the building blocks to get to your guide? Obviously, you generate the vast majority of your free cash flow in the second half, but I would have assumed that there's also some forward buying of inventory from your side that's weighing on results. Certainly looking at the working capital usage here today seems to be the case. So just talk through, if you wouldn't mind, the building blocks for the free cash flow. Thank you.

Sure. Yeah, we actually didn't do any significant forward buying as it relates to the tariff situation. The build and inventory that you see in the first half of the year is pretty much entirely focused on the home and garden seasonal build that we do every year, and that's mostly internal in our own factories. So we didn't do a lot of that. The building blocks, we obviously have a point of view on profitability for the year, though there's probably more variability in that than there usually would be halfway through the year. And then what we have is a vision of where we can go from a cost management perspective, managing our spend and also working capital. As David talked about, when we stopped ordering, particularly in the HPC business for the U.S. market, what that means is that we are selling off the inventory and not replenishing it. And as we get to the fourth quarter, we expect to be collecting a lot of those receivables of sales from Q3 that should benefit us from a receivables perspective in the second half of the year. So that's really how we built that. We have a lot of confidence in it. We really wanted to put it out there as a stake in the ground for our shareholders, quite frankly, to understand where we're at, what we're doing, and the valuation of the company.

Understood. Thank you.

Thank you.

This does conclude our question and answer session. I would now like to turn it back to Joanne Chomak for closing remarks.

Thank you. With that, we have 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 your participation this morning.

This does conclude the program. You may now disconnect.