Spectrum Brands - Earnings Call - Q1 2020
January 30, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Q1 twenty twenty Spectrum Brands Holdings Incorporated Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Thank you, and please go ahead, sir.
Speaker 1
Thank you, Chris. Welcome to Spectrum Brands Holdings fiscal twenty twenty Q1 earnings conference call and webcast. I'm Kevin Kim, Divisional VP of Investor Relations and moderator for today's call. To help you follow our comments, we've placed a slide presentation on the Events Calendar page of 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, Chairman and Chief Executive Officer Jeremy Smelter, Chief Financial Officer and Randy Lewis, our Chief Operating Officer. After their opening remarks, we will conduct a Q and A session. Now on our comments today looking our comments today include forward looking statements, including our outlook for fiscal twenty twenty and beyond. These statements 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 01/30/2020, and our most recent SEC filings and Spectrum Brands Holdings' most recent annual report on Form 10 ks and quarterly reports on Form 10 Q. We assume no obligation to update any forward looking statement. Also, please note, we will discuss certain non GAAP financial measures on this call. Reconciliations on a GAAP basis for these measures are included in today's press release and eight ks filing, which are both available on our website in the Investor Relations section. And now let me turn the call over to David Moore.
Speaker 2
Hey, good morning. Thanks, Kevin, and good morning, everybody. Thanks for joining us today for our first quarter conference call. As I stated on our last earnings call, the 2019, we expected to have a divot in our first quarter performance starting in 2020 and then to regain momentum in the balance of the year. In this quarter, we just reported organic sales were essentially flat with our adjusted EBITDA down 11.4%.
The first quarter decline in adjusted EBITDA was in line with our expectations as tariffs exceeded the ramp up of our productivity improvements. We expect to resume sales growth this quarter and additionally, our global productivity improvement plan is expected to catch up to our tariff headwinds. On the top line, we did experience organic growth in our Home and Personal Care divisions and in Pet. And while timing issues in our Home and Garden and HHI segments drove us flat overall, we continue to expect net sales, adjusted EBITDA and free cash flow growth in 2020. If I could have you turn to Slide seven, we are executing on our strategic plan and delivering full year revenue growth is a top priority for each of our teams.
For example, in our Home and Personal Care division, we had an outstanding quarter. This quarter, our appliance unit reported its first quarterly growth in over a year. We're particularly pleased to see this positive inflection point in our appliance business as it fuels our confidence as a management team that the investments that we're making to streamline our businesses, launch new products, invest in innovation, R and D and marketing are beginning to bear fruit. We experienced top and bottom line growth from Home and Personal Care, demonstrating tremendous progress from the new leadership team there led by Dave Albert. Additionally, this quarter represents fifth consecutive quarter of top line growth in our global pet care unit.
This was driven by a combination of continued growth in our dog chews and treats category, but more importantly, continued innovation and market share gains. This quarter also represented the third consecutive quarter of bottom line growth for our global Pet Care business. We continue to make progress on a number of fronts this quarter. First, we entered into an agreement for the sale of our dog and cat food manufacturing assets in Kevorden in The Netherlands for a price of approximately US33 million dollars Spectrum will continue to operate the commercial dog and cat food assets with the IMC and Eucanuba brands in Europe for the time being. But this action represents progress against our plan in Global Pet Care to exit non core assets and focus on our core brands.
Secondly, we continue to reward shareholders by executing $125,000,000 accelerated share repurchase program and we did repurchase 1,300,000.0 shares of our common stock for approximately $81,000,000 through open market repurchases during the quarter. Third, we made significant progress on our plans to generate over $100,000,000 of run rate savings from our global productivity improvement plan over the next fifteen to eighteen months. Much of these savings will be redirected to reinvest in our base businesses and to drive future growth, as well as offset additional tariff costs that we're experiencing in fiscal twenty twenty. There's much more work to be done this fiscal year as we execute on our productivity improvement plans and we embrace a more customer driven mindset. But I'm confident that our best days are ahead of us again as we work to deliver significant long term value creation and produce sustainable growth going forward.
Our Spectrum 2020 guiding principles remain vision. And our vision is to be a strong innovator of great products, marketed with excellence and supported by consumer insights. Clarity, which means we're continuing to simplify our businesses by streamlining our go to market strategies and becoming a much more productive and efficient company. And focus, focus is our relentless focus on our best in class customer service attributes. This is our pathway to a consumer driven mindset accepting nothing but outstanding quality and service, while increasing innovation, marketing investments, etcetera behind our brands.
These actions are evidenced in our Home and Personal Care business this quarter. We are driving a culture of greater accountability, much quicker decision making with an experienced and energized leadership team that's been refreshed with new talent and focused on operational excellence as we position our company for improved sales, earnings and sustainable free cash flow growth. Now you'll hear more from Jeremy on the financials and Randy will give you an update and some additional business insights from the different business units. Let me turn the call over to Jeremy.
Speaker 3
Thanks, David. Good morning, everyone. If you will turn to slide nine, I will start with a review of Q1 results from continuing operations beginning with net sales. Net sales decreased 1%, but excluding the impact of $6,300,000 of unfavorable foreign exchange organic net sales were essentially flat with growth in HPC and Global Pet Care offset by declines in Home and Garden and HHI. Gross profit fell 12%.
Gross margin of 30.9% decreased three eighty basis points as higher tariff costs, timing of capitalized manufacturing variances and GPIP restructuring costs were partially offset by productivity and positive pricing. SG and A expense of $226,500,000 decreased 11.1% at 26% of net sales this year compared to 29% a year ago driven by higher non cash depreciation and amortization charges recorded last year in HPC due to the reclass back into continuing operations in the period. The operating loss was driven by the recognition of a loss on the asset sale and impairment charges in Global Pet Care associated with the Caborden dog and cat food manufacturing operations and higher GPH infrastructure costs, partially offset by lower depreciation and amortization. Operating income was also negatively impacted this quarter by $8,500,000 of higher stock compensation from more normalized long term incentive compensation compared to a timing delay last year. This will normalize on an annual basis.
Adjusted EBITDA decreased 11.4%. Growth in Global Pet Care and Home and Personal Care were offset by declines in Hardware and Home Improvement and Home and Garden. Adjusted EBITDA margin declined 140 basis points driven primarily by higher tariff costs, timing of capitalized manufacturing variances and stranded costs, partially offset by productivity and positive pricing. If we turn to Slide 10, you can see Q1 interest expense from continuing operations of $34,800,000 decreased $22,200,000 driven by our lower debt levels. Cash taxes during the quarter of $14,500,000 were $4,500,000 higher than last year, driven by a tax audit settlement that was paid in the quarter.
Depreciation and amortization from continuing operations of $41,700,000 decreased from $66,000,000 last year, primarily due to the impact of HPC depreciation and amortization in the prior year that I mentioned earlier. Separately, the share based compensation increased from $6,000,000 last year to $15,000,000 this year. Again, as I mentioned earlier, this will normalize on a full year basis. Cash payments for transaction related charges were $4,600,000 down from $20,000,000 last year. Restructuring and related charges for Q1 GPIP and including discontinued operations were $38,600,000 versus $9,900,000 last year.
The higher cash spend was driven solely by GPIP. Moving to the balance sheet, we completed Q1 in a strong liquidity position, including $678,000,000 available on our $800,000,000 cash flow revolver and a cash balance of $142,000,000 Debt outstanding was $2,400,000,000 down 50% from $4,800,000,000 at the same time last year. As compared to the prior year quarter, first quarter ending inventory was lower by $95,000,000 as our operating teams continue to drive more discipline and improved process into our working capital management enabled by our continued investments in capacity and automation. In addition, in January, we paid the previously disclosed payment to Energizer in connection with the divestiture of the BARDA business. In addition, we continue to hold 5,300,000 shares in Energizer currently valued at approximately $250,000,000 CapEx in the quarter was $18,700,000 versus $13,500,000 last year.
Turning to Slide 11 now on our 2020 guidance, we are reaffirming our 2020 guidance for net sales, adjusted EBITDA and adjusted free cash flow. We still expect low single digit reported net sales growth with foreign exchange expected to have a slightly negative impact based on current rates. Adjusted EBITDA is still expected to be between $570,000,000 and $590,000,000 This guidance includes GPIP benefits and the impact of tariffs that are currently in place. Fiscal twenty twenty adjusted free cash flow from continuing operations is still expected to be between $2.40 and $260,000,000 Depreciation and amortization is expected to be between $145,000,000 and $150,000,000 excluding stock based compensation of approximately $55,000,000 to $60,000,000 relatively consistent with last year. Full year interest expense is expected to be between 140,000,000 and $150,000,000 including approximately $10,000,000 of non cash items.
Cash interest payments are expected to be between 130,000,000 and 140,000,000 Restructuring and transaction related cash spending is expected to be between 90,000,000 and $100,000,000 CapEx also is expected in the 90,000,000 to $100,000,000 range. Cash taxes are still expected to be between 45,000,000 and $55,000,000 and we do not anticipate being a significant U. S. Federal cash taxpayer during fiscal twenty twenty as we continue to use net operating loss carryforwards. We started this year with approximately $800,000,000 of usable federal NOLs.
And for adjusted EPS, we continue to use a tax rate of 25% including state taxes. Now I'll turn it over to Randy for a more detailed look at our business unit performance.
Speaker 4
Thanks, Jeremy. Good morning, everyone, and thank you all for joining us today. At this point, I'll walk through the results of each of our business units. So turning to Slide 13 and Hardware and Home Improvement. First quarter reported net sales organic sales decreased 2.42.5%, respectively.
The lower net sales were driven by residential security and builders' hardware categories, partially offset by growth in Employment category. The decline in Residential Security was driven by lower Builder volume, and Builders' Hardware was driven by timing of orders from two large customers. Adjusted EBITDA decreased 23%, driven by incremental tariff costs and lower manufacturing volumes in the quarter, partially offset by higher pricing and lower distribution expenses. We remain excited about the outlook in this category of the electronic deadbolt smart locks in 2020, given the relatively low but fast growing US residential adoption rates. As an example of this, earlier this month, the QuickSet team introduced the Halo Touch Wi Fi Smart Lock at the Consumer Electronics Show in Las Vegas, further innovating the Halo Smart Locks by providing homeowners access to their homes via fingerprint.
This is the first in the industry to have this technology. We are very pleased that this innovation was given a Best Home Tech Product award by several different outlets. In this space, we continue to use our proprietary cloud based platform and new mobile application as a competitive advantage for launching new product introductions in this space. Additionally, our strategy in the Plumbing segment is expected to deliver significant new wins in this segment, and we look forward to updating you on that in our next quarter of call. We believe our long term growth will be driven by our robust electronics product road map and the new introductions our teams are bringing to market this year.
Now to Home and Personal Care, which is Slide 14. We are very happy to report that the first quarter reported net sales increased 1.5%. Organic net sales grew a solid 3.2. Adjusted EBITDA grew 4%. Net sales were driven by growth in Europe in both Personal care and small appliances.
And net sales in The U. S. Declined slightly compared to prior year, driven by the performance in department stores and specialty channels. As David alluded to earlier, these results demonstrate remarkable progress in our road to recovery with the new appliance leadership team rebalancing its cost structure with the objective of accelerating profitable growth for our trusted brands through compelling and innovative products. Our consumer driven mindset in Europe continues to pay dividends with top line growth.
For example, over the last year, strong growth from new product innovation in Remington men's grooming as far outpacing category growth rates. Additionally, Russell Hobbs has achieved significant share gains, especially in The UK home market. There's much more to come in the appliance category, and we believe this renewed focus on supporting our strategic brands and investing behind fewer, bigger, better products will lead to continued growth in 2020 and beyond. Moving to Global Pet Care, which is slide 15. First quarter reported net sales increased 0.5%, and adjusted EBITDA increased by 8.2.
Excluding currency, sales grew 1.1% in the quarter. Higher net sales were attributed to continued growth in The U. S. Companion Animal segment as we overcome a decline in U. S.
Aquatics. In Europe, sales grew both in Aquatics and Companion Animal segments. We experienced continued growth in the Companion Animal sales in Q1 in The U. S. Despite lapping a double digit increase in the market from the prior year.
Our pet team remains committed to exiting noncore assets and activities to invest more time and resources into our targeted top growth brands. As David highlighted earlier, we demonstrated this commitment by exiting our Rawhide manufacturing facilities in Latin America and agreeing to exit our Cove Larden dog and cat food operations in The Netherlands. Given positive category growth projections for increasing participation rates and passionate pet owners, we continue to be pleased with our innovative product roadmap and strategy for growth in pet business. During the holiday season, Smart Bones was listed as a top seller award winner by our largest online retailer. And dog chews and treats growth in Canada and Latin America benefited from new listings for our Good and Fun brand and Smart Bones brands at several major retailers.
We are also encouraged by our continued partnership developments in The US Pet Specialty channel, where multiple new product listings are expected to start shipping later this year. Turning to Home and Garden, which is Slide 16. First quarter reported net sales decreased 13.9%. Adjusted EBITDA decreased $6,400,000 While Q1 revenue and EBITDA were below prior year, keep in mind that Q1 represents the smallest quarter of the year. Sales were impacted by higher than normal inventories of customers as a result of unfavorable weather in 2019.
However, as we exit the quarter, we believe our customers have a much improved inventory position as POS has been very positive since the beginning of Q2. In the quarter, EBITDA was also impacted by the timing of manufacturing costs due to a planned later seasonal inventory build as well as higher advertising investments as we committed to. In the last twelve months, we've continued to grow market share in all three business segments of Home and Repellents, Household Insect and Outdoor Controls. Going forward, we continue to be encouraged by our seasonal planning with our retail customers, our consumer promotion plans, and the weather outlook for this spring. We are confident that our solid brand equities, investment in product development and marketing will drive growth.
Turning to 17. We also wanna provide excuse me. An update excuse me. We also wanna provide an update on our global productivity improvement plan. Program continues to be our most important strategic initiative for delivering sustainable organic growth as we focus on quicker, more globally aligned decision making within each of our businesses, driving more focused and relevant product innovation, the enhanced consumer analytics and r and d processes.
Since our last call, we have successfully closed the Latin American Rawhide facilities and Global Pet Care, and in late November entered into the sale agreement we discussed about the Pooh, Lord and Dove and Cat Food manufacturing operations. We have continued to lock in significant savings from new center led sourcing processes. We continue to expect the gross annualized savings from the various work streams of GPIP to deliver at least $100,000,000 annually, and that these savings will be at full run rate in the next fifteen to eighteen months. Much of these savings will be reinvested back into growth initiatives and consumer insights, R and D and marketing across each of the businesses. One of the most exciting developments in the quarter was the launching of our center led commercial operations team.
The formation of this team will enable a centralized approach to consumer insights, digital asset development, ecommerce operation, and revenue and profit management for each of the business units to marry their individual brand, product, and channel strategies. This group is being led by one of our strongest internal leaders and will be a major step forward in how we efficiently harvest, analyze, and deploy data to drive long term organic growth. We look forward to continuing to provide more updates and details on our very exciting GPIP benefits on our future calls. Now back to David.
Speaker 2
Thanks so much, Randy. Thanks, Randy. Thanks, Jeremy, Kevin. Thanks, everybody, for joining us this morning on the call. With our first quarter, as I call it, the first quarter divot behind us, we're pleased to begin realizing additional benefits from the global productivity improvement programs, which Randy described in detail and returning our company to growth in the second quarter and for the balance of this fiscal year.
I'd like to thank all of our teams for the progress in revitalizing our company and driving change for our future success. We do have a strong balance sheet and healthy liquidity and we are now setting our sights on accelerated growth. We also continue to believe that our share price continues to be materially undervalued and we will repurchase our stock opportunistically from time to time. The team and I are proud that we were able to deliver on our financial commitments for 2019, which has only strengthened our resolve to deliver our 2020 financial guidance of low single digit sales growth, adjusted EBITDA of $570,000,000 to $590,000,000 and adjusted free cash flow of $240,000,000 to $260,000,000 And going forward, we expect to drive material further growth in our free cash flow generation from there. Now I'll turn it back to Kevin to take any of your questions.
Speaker 1
Thanks, David. Chris, let's just jump right into Q and A.
Speaker 0
And our first question comes from the line of Bob Labick with CJS Securities. Your line is now open.
Speaker 5
Good morning. Thanks for taking my questions. Good morning, Bob. Good morning, Bob.
Speaker 3
Hi. So on prior calls,
Speaker 5
we've talked about part of your growth and an expected reacceleration in growth is driven by consumer centric new products. Could you you've alluded to it a little bit on the call already, but could you talk more about the pipeline of new products and maybe the new product introduction capabilities and process now versus a year or two ago and where that's going to go?
Speaker 2
I'll let Randy handle that one.
Speaker 4
Yeah, good morning, Bob. So that's a major component of our GPIP. We talk about GPIP and we talk a lot about it being kind of savings front loaded. But really behind the scenes, the heavy lifting is in redesigning that innovation process. And we're working with some world class experts to help guide us through that.
It starts with this commercial operations team that I discussed in the prepared remarks, where we tend to want to centralize all of the generalized functions of scraping and harvesting data of what's happening within categories, macro, micro, internal, external. And then vending that back into a disciplined innovation process
Speaker 3
within each
Speaker 4
of the businesses that's aligned with the brand strategies, the channels, and the products. And so those new product development processes are embedded in each of the business units. And they tend to be at a little different stages of development. But as an example, HHI being first to market with a fingerprint Wi Fi lock that we continue to be able to hang on our own security cloud is just kind of the tip of the iceberg of being able to launch a whole line of products in that space. When we look at our appliance business, very happy with the progress we've made there in the last year.
And it's not been short term minded. From the very beginning, David was committed to revamping that business with a focus for growth. And we could have turned around bottom line numbers much quicker if we weren't committed to the long term. And so we've got a great NPI engine there. And we're doing a lot there to focus that on fewer, better, stronger.
We've got a number of new and exciting products coming out in that space within the next couple of quarters. We'll be launching a George Foreman smokeless contact grill in The U. S. That will start shipping later this quarter. And exciting new products in Remington Wet style, Black and Decker air fry toaster ovens, etcetera.
And so that's evidence there. A little bit longer timeline in Home and Garden, but you'll start seeing products that we'll be launching out of that process later this year.
Speaker 5
Does that help, Paul? Yeah, absolutely. No, that's super color. I really appreciate that. And then I don't know if it's in the earnings slide deck today, don't think.
But in recent slide decks, you've discussed that 15 of your brands make up about 80% of your sales. You've also talked about divesting non core businesses. Can you talk a little bit about the other is it other brands? Or where the portfolio optimization stands? Might there be other small sales like the European divestiture of Dog and Cat you mentioned today?
Or where is that process?
Speaker 2
Look, I think we've been pretty open about it. We want to feed the winners and starve the losers. And but I think most of the streamlining is done. I mean, frankly, I mean, our global footprint in Pet and again, thanks to that team for bearing down hard. We'll have probably four facilities down from 10 and we'll be actually growing our sales pretty nicely, resuming pretty good growth here in the second quarter on Pet, much better than what you saw this quarter.
So again, everything is about productivity. Everything is about getting greater yield. And it's the design is what I'm really excited about. Everything here is built on getting data to make sure that as we allocate capital internally, we're doing it much more efficiently and getting a higher return on those dollars. So look, yes, there's no question things like Covarden are a little bit disrupting and they caused some noise in the quarter.
And it's we're still not done, but I think we're down to little pieces of it. And so yes, that business, it's nice to get $33,000,000 on an asset that quite frankly was dormant and we weren't making a profit on it. And we've got a good partner there to take that asset over and give our people employment. And quite frankly, there'll be a synergistic partner there. But look, most of the teams have already you know, jumped on board with with the whole mantra of, you know, vision, clarity, focus.
And I think, you know, everybody knows who they what they stand for, where they're going, and and what their hero brands are and what to support at this point. You did Randy, you disagree with that?
Speaker 4
Or No. Think that's exactly right. As we've transitioned from a more and more and more strategy, which led to a lack of global prioritization, we focused very heavily on realigning the businesses on global brand strategies. And so Bob, there's not a lot of large assets that we're talking about. But we have literally dozens of smaller brands and product categories that have kind of emerged around the globe.
And they just become distracting on resources. And so a lot of effort going into making sure that we're focusing within each of our businesses on those strategic brands. And those brands will get the investment. They'll get the NPI. They'll get the top talent.
And that's where a lot of the growth is
Speaker 5
going to come from. Great. That's super. Thank you so much. Thanks, Bob.
Speaker 0
Thank you. And our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.
Speaker 6
Okay, great. Thank you very much. Just kind of keying in on your comments about the return to growth in the second quarter. What in particular is driving that? What in particular are you particularly excited about?
And give us a little more color there. Thanks.
Speaker 3
So growth in the second quarter, I mean, I think as we talked about in appliances and pet, we expect that growth to continue. As we mentioned on our fourth quarter and guidance call, we expected growth in all four businesses, top line and EBITDA. I think Randy has talked about new products coming down the pipeline, which will help accelerate that growth from first quarter on through the rest of the year. And then particularly in Q2, some of the challenges we had around the seasonal side of the Home and Garden business, we expect to improve sequentially. Yeah.
Speaker 5
You have
Speaker 6
little Go
Speaker 5
on. I
Speaker 4
was just gonna add a little bit of color for the team as far as the Home and Garden business for the season. While we're bullish on the year, and we've got good weather forecast for the spring, it is important to understand that we're seeing a different strategic approach to category from some of our top retailers. Actually seeing a heightened strategic focus that is exciting to us. But the timing is going to be different. Many retailers really loaded up front last year.
And so the pacing of revenue over the course of that business this year is going to change to be a little bit more back end loaded than what it was before. But overall, Jeremy is right. It's the timing of new product introductions in each of the businesses.
Speaker 6
Okay. And then just one other question on the tariff side. What should we expect for the remainder of the year? And then just can you tell us what the impact would be given the kind of all the moving parts of tariffs maybe going away, etcetera? Look,
Speaker 2
I think we've disclosed in the past the headwinds we're facing. Look, obviously, Phase one, I think a lot of people expect that to be massively beneficial. We would tell you it's slightly beneficial. But I mean, my main takeaway on Phase one is it's we're not getting hit in the face anymore. We will pick up a little bit of incremental benefit there, but it's immaterial.
And so the best thing I think that's occurred is there's some clarity and certainty in the marketplace where our retail customers you could see stuff where people would get nervous about tariffs getting more out of control and do some pre buys. Now I think with certainty with Phase one, I think our customers are resuming to more normal trading patterns And that also gives us fuel for our confidence in Q2 growth.
Speaker 6
Okay. Thank you very much.
Speaker 3
Thanks, Ian.
Speaker 0
Thank you. And our next question comes from the line of Olivia Tong with Bank of America. Your line is now open.
Speaker 7
Great. Thanks. Good morning. I wanted to talk a little bit more about sales because you guys had been pretty explicit about EBITDA expectations to start the year. But sales was quite a bit lower than what the market was expecting.
So relative to your expectations, what didn't go as expected? And then just on specifically on HHI for a minute, that was particularly surprising given the strength in housing data, both new remodels, etcetera. So you mentioned a few things on the timing. Have those orders that you expected to come that you expected in the December quarter now come through? And then if you could talk about the decline in residential locks too.
Thanks.
Speaker 4
Yeah. Good morning, Olivia. So, with regards to the quarter, we talked about Home and Garden, being a little bit of timing. And so, as we got closer to the season, we're seeing that several large retailers are taking a more measured approach to the feed in. And therefore, some of the things we might have expected to ship at the December are coming in in Q2.
With regards to HHI, it was kind of mainly three areas where we had hit with two large customers who took inventory out of their system over the course of the quarter, we believe, related to potentially terrifying patterns as David alluded to before. We did have a material Black Friday event that we had last year in the quarter that didn't anniversary this year. And then we were in the final quarter of lapping two material losses of low margin items from a year ago. So that's the main drivers of HHI. And we're continuing to watch it closely.
The category, as you said, the metrics, the market is pretty solid. And we expect that to turn back to growth and to deliver good numbers for the year.
Speaker 7
Got it. If I can just ask specifically on residential locks, because that's obviously a business there where you alluded to quite a bit of the innovation and, obviously, the tailwinds. So the business that you lost there, I would assume, is lower margin relative to HHI average?
Speaker 4
Yes. It was lower margin, and it was older technology. And it was in where we were not willing to go chase pricing and was kind of related way back to outcomes from the challenges we had in supply chain execution eighteen months ago.
Speaker 7
Got it. And then if I could just follow-up on market share positions across the portfolio because HPC seems like that's now stabilizing, but HHI has some losses. H and G, at least you underperformed your closest competitor. So if you could talk through what's going to drive that improvement there? Because you mentioned the retailer excitement around but also pushing out orders, which seems a bit at odds with each other.
Speaker 4
So if you're comparing our Home and Garden business to a large competitor, there's a big gap in the lineup there. And so we're when you look at our product categories versus another competitor there, there's there's about a 12% overlap of revenue. So we don't compete in many of the categories and the trend lines tend to diverge. So as we look at the categories that we compete in, insect repellents, indoor insecticides, and outdoor controls, our data would show that we've taken share, especially at the home centers, in each of those segments over the last twelve months. And as far as the timing goes, it's not super concerning to us there.
As long as the inventory is available and we've got the the capabilities, we last year, we were able to meet expectations of our retailers when they accelerated purchases, and it was not a problem. So as they delay those orders, I'm still not worried about that.
Speaker 7
Got it. Thank you.
Speaker 4
Thanks, Olivia. Absolutely.
Speaker 0
Thank you. And our next question comes from the line of Faiza Alwai with Deutsche Bank. Your line is now open.
Speaker 8
Yes. Hi. Good morning. So a couple of questions from me. Just first on HHI, just wanted to go back on the timing of orders.
I don't think you quantified the impact from that. So I'd love to hear, you know, how much the impact was just on the timing of orders on the Builders Hardware piece. And then I know that I believe Builders Hardware is where you might be competitively disadvantaged due to tariffs because you'd consolidated your manufacturing in China. So I wonder if there's been a little bit of impact from that. And is there sort of a pricing component there?
And are you seeing sort of some any volume impact from that pricing?
Speaker 2
On Builders Hardware specifically, we're taking material actions internally to get more efficient there, to lower our cost structure, and to improve our profitability materially in the current fiscal year. And all I'll say on HHI is we expect to resume we are resuming the growth in Q2 and we expect a very good finish for hardware for the balance of the year. I think I'd like to go back to the Home and Garden piece of it. It was $46,000,000 of revenue, I believe. Just again, I know we live in a short term world, but every other quarter in Home and Garden is typically 150,000,000 or $200,000,000 a year.
So I wouldn't get overly concerned about Home and Garden.
Speaker 8
No. I completely agree. I think Home and Garden is pretty irrelevant for this quarter. I was just I was more concerned about HHI and and the Builders Hardware piece. But I also I was wondering if I could get more color on the Pet segment because, you know, you've done really well on the, you know, treat side of that business, but comps do get a lot tougher.
So how are you thinking about growth for that segment for the remainder of the year? And then I just wanna understand the mechanics of the sale of these facilities. I mean, it sounds like so you're keeping those brands so those businesses aren't really going away. You're just gonna be outsourcing manufacturing. Is is that really what's happening?
Speaker 4
Yeah. So so let me let me try and take those questions. Maybe I'll do it in reverse order. So with regards to the pet facility, the mechanics of it is the fact that we are working with a synergistic partner who will take over the operations. This will be one of many facilities that they operate in the European continent.
And so they bring a ready made understanding about how to operate with high degrees of efficiency and cost improvements. They will be able to instantly add capacity to an underutilized facility, thus improving the absorption and freeing us to focus on the commercial aspects and the brand management. We'll continue to look for strategic options for the remainder of that business. But overall, it's going to be a net positive for us from an operation of, again, freeing up those resources. With regards to the future comps in PET, we're feeling good about that.
Because one of the things Bob asked the question earlier about the NPI process. And PET is where that cycle is the shortest. And consequently, it's where the fruit of our work a year ago, eighteen months ago, has really started hitting the market and has been evidenced since last summer. So we continue to see a higher vitality rate. I mentioned in the prepared remarks that we are returning to positive relationship building with U.
S. Pet Specialty. And for anyone who's followed us for a while, you know that's a major advantage for us. And then innovation coming in the aquatic space. So we had a major U.
S. Retailer who decided to exit live fish. And that's having an impact on the category, but we're actually being able to counterbalance that much better than we anticipated. And our GloFish business is a key piece of that. Being able to bring innovation into a somewhat stagnant category is really exciting.
And so we continue to launch new species and new colors. And if you haven't heard, we'll be launching the world's first ever GLOBE beta later this quarter. And so we've received FDA approval three weeks ago. And so later in this quarter we will be launching with three species in the first color. And so that's driving a lot of excitement in those spaces.
I mean, these are fish that will retail for up to $29 each. And they're really exciting. And they target a whole new category where a betta fish can be kept singularly in a small desktop tank. And it really broadens the appeal to the entry point of that category. So it's those types of things that have us feeling confident about continued pet growth.
Speaker 8
Understood. Thank you.
Speaker 0
Thank you. And our next question comes from the line of Jim Chartier with Monness Crespihardt. Your line is now open.
Speaker 4
Hi, thanks for taking my question. I just wanted to
Speaker 9
talk about some of the marketing investments you guys have made over the last eighteen months. Any color you can give us there on what kind of returns you're seeing? Are you seeing the lift in the products you're investing behind? And then specifically on Manchester United, is that partnership fully activated? And what are you seeing there?
Speaker 4
Thanks, Jim. So I don't think we're going to go into the detailed specifics of the ROIs by brand investments. But overall, we are measuring the ramp up of those investments to be more focused and more aligned with the brand strategies that I discussed earlier, being more aligned globally. And so one of the aspects of the commercial operations team that we announced this past couple weeks is exactly that. It's putting additional external resources around ensuring that we've got visibility to those ROIs and we can make better, faster decisions in that space.
With regards to Manchester United, fully executed and seeing really positive impacts there. I don't have those data points with me in front of me, but I don't What the
Speaker 2
growth rate in Remington Europe this last quarter?
Speaker 4
We'll have to find that number. It's it's buried in my deck here. But you can definitely see it in Remington, both from the standpoint of Europe, but also in Asia Pacific also.
Speaker 9
Great. And then on the Smart Locks, you guys have highlighted your in house cloud platform. Do your competitors have in house platforms themselves? And I guess what kind of advantage does your platform provide versus the rest of the industry?
Speaker 4
We believe our platform is unique within the major providers. And what is really important about this is back before smart locks, you know, the key was controlling the key. And the lock and the key combination was the key to that category. As we move to smart locks, it's all about controlling the credentialing of whatever you're using to replace the key in that interface, both from a standpoint of technology, reliability, speed, and security. So being on our own cloud greatly improves our overall security of the product.
It greatly improves the operation and consumer experience, because everything is done locally. So much faster reaction times. And on top of that, you don't have to rely upon a home hub network. You can connect directly into your Wi Fi system. So it takes an additional step, an additional cost, an additional unreliable step out of the process in smart home development.
Speaker 2
I thought that like the Remington thing, I'd ask the team. But I believe we grew 9% with Remington in Europe and that's based on fully loaded Manchester United programs. And so I just want to give you some color while we don't want to go into ROIs on everything. The teams are continuing to do what's hard, right? And what's hard is when you have a quarter like this for Home and Garden where you guys are clearly depressed that the top line is down, we keep spending on advertising, we keep building those brands.
And we're doing what is right for the base businesses long term. And so again, like I'm personally thrilled that after nine months, we now have the top line and bottom lines growing on our appliance units. And it's up to us to maintain the discipline that no matter what the quarterly headwind is or the tariff headwind that we keep investing for growth. And that's despite the category over in Europe being down 1.3%. So we're swimming upstream pretty fast.
Speaker 9
Great. Thanks for the color.
Speaker 0
Thank you. And our next question comes from the line of William Reuter with Bank of America. Your line is now open.
Speaker 10
Good morning. I know most of the tariffs for you guys were List three issues. But given that the List four has been both pushed off and eliminated, is the 80,000,000 to $85,000,000 of incremental tariffs still the right number? Or should it be lower than that?
Speaker 2
I think you still have a good ballpark. I think net net, we probably have a couple million dollar small something we got a small benefit, 2,000,000, dollars 3,000,000, something like that. That's all we want to disclose at this time.
Speaker 10
Okay. And then, I guess, in terms of price increases that you implemented this year, do you have a sense for what percentage of that $80 to $85 you may have pushed through in price at this point?
Speaker 4
Yeah. So, William, I won't go into specifics, but we did get well over 50% of the tariff cost impacts in pricing. But that varied dramatically by business and by category and by channel, depending upon a number of factors as you can imagine. So it was roughly maybe 60% across the portfolio, but there was a widespread.
Speaker 10
That's useful. And then just lastly for me, when you last updated us, your leverage target was 3.5x, given the rapid share repurchases, you guys are a little bit above that right now. I guess, do you continue to have that as your target? And I guess, how should we think about that in the context of share repurchases going forward?
Speaker 2
Yeah. Here's how you should think about it. Three and a half to four times leverage is where I wanna steer the ship. The company is materially undervalued at the moment. I'm happy to take leverage above that for a short period of time because we're running the business for the long term, and we are steering toward a $7 per share free cash flow business in 2021.
And so with shares trading at these multiples, we will be buying stock.
Speaker 10
Sounds good. That's all for me. Thank you.
Speaker 0
Thank you. And our next question comes from the line of Carla Casella with JPMorgan. Your line is now open.
Speaker 11
Hi. Just one follow on on the tariff. I mean you talked about mitigation and it coming through back half of the year. How much of that is moving the sourcing? And pro form a by the end of this year, where do you expect to be in terms of your amount of goods, percentage of goods, however you want to look at it, sourced from China?
Speaker 2
Okay. I think our appliance unit will remain sourced out of Asia, China. We are making some changes to footprints and other parts of the businesses to become less reliant on China and to push things into neighboring countries. Don't want to go into specifics on that yet. But yes, we continue to move the supply chain around to benefit the company and we'll continue to do so.
But look, I think what we want to hopefully get across to you guys today is that we the dividend in Q1 was expected from Q4. We've basically taken the pain and we expect productivity to now catch that up in Q2. And then going forward, we're hoping to be through with this whole discussion on tariff and get back to materially growing the business and also reinvesting in a much healthier manner to propel the top line.
Speaker 11
Okay, great. And then just one more. You talked about a couple plants, potential one closing and one potential. Are there other opportunities there? And on the flip side, you're talking about investing in the business.
Is some of that any of the additional CapEx you'll need for plant investment beyond kind of what you've guided to this year? Or are you in a good spot after you complete the process you're in now?
Speaker 2
My answer is we're in a good spot, but I'll defer to Randy.
Speaker 4
Yeah, just a little color, Carla. We had four manufacturing locations throughout Latin America that produced dog chews and treats. Those are the four that we announced that we have closed in the course of the quarter. And then also the manufacturing facility in The Netherlands which we will divest. There may be other changes in the future but not significantly more.
And we are in a good spot with our manufacturing footprint. And so we will continue to use kind of the run rate, maybe less in total on CapEx going forward, to drive efficiencies in automation. But you should not be thinking that there's a big hump in the CapEx to adjust to this. That's not connected.
Speaker 11
Great. Thank you so much.
Speaker 0
Thank you. And our last question comes from the line of Karru Martinson with Jefferies. Your line is now open.
Speaker 12
Good morning. Just on the Chinese virus that's in the headlines, is is that affecting any of your production capabilities? And what's the impact there?
Speaker 2
We're definitely taking less flights to the Mainland. But look, our contract manufacturers are there. It's potential we could get like a week delay on some of the shipments coming into the LA ports, but we don't expect any material interruptions.
Speaker 12
Okay. And then when you look at your stock price versus acquisitions out there, do feel that you have the right footprint? Or are there bolt ons that you would like to add? Or is it just that your stock price is too compelling at this point?
Speaker 2
I can't find anything to buy cheaper than my own stock.
Speaker 12
Okay. And just a clarification, when does the GLOBE beta come out? My son's in the market after his after a friend killed his other fish.
Speaker 4
Okay. I think you should be looking at US Pet Specialty in the March. We'd be glad to send you the information.
Speaker 12
Appreciate it. Thank you.
Speaker 4
Thank you.
Speaker 0
Thank you. And this concludes today's question and answer session. I would now like to turn the call back to Kevin Kim for any closing remarks.
Speaker 1
Great. Thank you, David, Jeremy and Randy. On behalf of Spectrum Brands, thank you for your participation.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.