Spectrum Brands Holdings, Inc. (NYSE:SPB) Q1 2024 Earnings Call Transcript February 8, 2024
Spectrum Brands Holdings, Inc. beats earnings expectations. Reported EPS is $0.78, expectations were $0.31. Spectrum Brands Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Joanne Chomiak, Senior Vice President of Tax and Treasury. Please go ahead.
Joanne Chomiak: Thank you. Welcome to Spectrum Brands Holdings Q1 2024 earnings conference call and webcast. I’m Joanne Chomiak, 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 events 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 2 of the presentation, our call will be led by David Maura, our Chairman and Chief Executive Officer, and Jeremy Smeltser, our Chief Financial Officer. After opening remarks, we will conduct the Q&A. Turning to Slide 3 and 4, 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 February 08, 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 Maura. David?
David Maura: Hey. Thanks, Joanne. Good morning, everyone, and welcome to our first quarter earnings results for 2024. Thanks 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 will 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 2023 that put us in a strong position as we entered fiscal 2024 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 are beginning the journey back to winning again.
I’d like to ask you to turn your attention to Slide 6 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 & Personal Care segment, we expected suppressed demand, particularly in small kitchen appliances. In our Home & Garden segment, we expected home center retailers to be cautious in their preseason 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 topline 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 topline 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 2023, 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 6.2x, 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 are using it to fuel investments back into our businesses to drive topline 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 7 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 & Garden and HPC businesses are reinvigorated, and they are 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 road maps 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 innovation. 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 2024 inventory is down $360 million from the high point in the third quarter of fiscal 2022, and it’s down $245 million from the first quarter of fiscal 2023. This lower investment in inventory helps not only our cash flow, but it also helps our supply chain operations to 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 8. 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 repurchased shares in the open market during the first quarter of this fiscal year. In December, we entered into a new $200 million 10b5-1 plan that 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 9 or Page 9, sorry. We are encouraged by the first quarter results this year, but we remain prudent in our full-year expectations. We are 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 a year. However, we are encouraged by our strong start to fiscal 2024. 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.
Jeremy Smeltser: Thanks, David. 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 SKU rationalization decisions we made in fiscal 2023 within our Global Pet Care and Home & 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 FX 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. GAAP 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. Depreciation 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 sales 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 America sales were adversely impacted by our decision last year to exit several non-strategic categories such as waste management and lower profit SKUs. These activities have reduced our North American active item count by nearly a third.
And while the impact from a topline perspective is a purposeful headwind, these actions are having a positive impact on margins, turns 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 Aquatics sales and the impact of our SKU 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 Meowee and Good ‘n’ 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 ‘n’ 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 2024 to have lower topline growth than our long-term target, particularly in the first half of the year due to the impact of our SKU rationalization efforts and the challenge to Aquatics demand. Moving now to Home & 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 Shot 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. 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 2024, we are investing in innovation and brand support to drive topline growth and expanded liftings 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 and 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 One-Shot 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 & 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 2023. We are anticipating a competitive retail environment in Home & Garden this year and are ready to react as the season develops. Finally, we’ll turn to Home & 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 North American market, with a 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 topline 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 PowerXL business, due to continuing challenging demand and our exit of certain Tristar SKUs in fiscal 2023. 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 topline during the holiday season and creating opportunities for ongoing sales. Retailers continue 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 2024. We are extremely proud of the Good Design award received by three of our Remington ONE products, the Dry & Style, Straight & 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 topline 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 in our brands and people. We also expect some pricing pressure in Home & Personal Care as competition is expected to remain fierce. From a phasing perspective, we continue to expect the demand pressure in the Home & Personal Care segment to be more pronounced in the first half of the year. We expect our home center customers for the Home & Garden business to wait until spring to take on material inventory in preparation of the season.
These factors, along with the product portfolio rationalization impact in the Global Pet Care and HPC businesses, will pressure topline comparisons to last year, particularly in the first half. Turning now to Slide 17. Depreciation and amortization is expected to be between $115 million and $125 million, including stock-based compensation of approximately $15 million 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 million 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 2024.
Now back to David.
David Maura: Thank you very much, Jeremy. Thank you everybody for joining us today. Let me just take a couple of 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.
Joanne Chomiak: Thank you, David. Operator, we can go to the question queue now.
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