Spectrum Brands - Earnings Call - Q2 2021
May 7, 2021
Transcript
Speaker 0
Good day, and thank you for standing by. Welcome to the Q2 twenty twenty one Spectrum Brands Holdings Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker for today, Kevin Kim.
Please go ahead.
Speaker 1
Great. Thank you, Francis. Welcome to Spectrum Brands Holdings Q2 twenty twenty one 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 Event Calendar page in the Investor Relations section of our website at www.spectrumbrands.com.
This document will remain there following our call. Starting with Slide two of the presentation, our call will be led by David Mora, Chairman and Chief Executive Officer Jeremy Smeltzer, Chief Financial Officer and Randy Lewis, Chief Operating Officer. After their opening remarks, we will conduct the Q and 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 05/07/2021, 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, note, 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 eight ks filing, which are both available on our website in the Investor Relations section.
I will now turn the call over to David Moore.
Speaker 2
Thank you, Kevin. Good morning, everybody. Thank you for joining us for the call today. Before I get started, I want to take a moment and speak directly to our employees and our partners around the world. While our work is far from complete, our financial results reflect another quarter of strong top and bottom line growth and further confirm that we are structuring for growth and efficiency to serve our consumers, customers and stakeholders.
I'm also very proud of the progress we've made these past three years. Our teams have embraced both our new global operating model and the spirit of our servant leadership culture. They've also persevered through a global pandemic to deliver excellent and consistent financial performance for our stakeholders. Because of you, our employees, the new Spectrum Brands has emerged a more efficient, focused, productive and consistent operating company. We will continue to be driven by our values of trust, accountability and collaboration to serve our mission as we make living better at home.
Again, I thank you, much appreciation. If I could have your attention now turn to Slide six. Our latest financial results for the second quarter reflect another excellent quarter of top line growth and operating leverage. Our investments in marketing and advertising for our trusted brands were higher in each of our business units and this continued to drive strong demand this quarter. Our second quarter revenue grew 22.6% as we achieved double digit growth across all of our business units.
And our e commerce sales grew nearly 43%. Turning to the bottom line, second quarter adjusted EBITDA increased 28.8 driven by higher volumes and improved efficiencies from our global productivity improvement program. Our operating leverage also improved despite higher inflation and incremental investments that we're making in marketing and advertising. As we outlined during our prior earnings calls, our reinvestments continue to reignite the flywheel of new product launches, improving our top line growth, expanding our margins and driving greater profitability and cash flow generation.
Speaker 3
If I
Speaker 2
could have everyone turn now to Slide seven. As has been well documented, transportation and commodity related inflation continue to negatively impact our industry. Consistent with our highlights last quarter, we expect these headwinds to more heavily impact the second half of the year. Jeremy and Randy will provide additional detail during their prepared remarks, but despite these headwinds, our stellar first half performance and our continued organic growth give us confidence in again raising our earnings framework to reflect mid teens net sales and adjusted EBITDA growth. Adjusted free cash flow of $260,000,000 to $280,000,000 We are well positioned going into the third quarter.
And while we recognize tough comparisons as we lap last year's fourth quarter performance, we will continue to focus on disciplined execution of our winning playbook, leveraging our stable manufacturing and distribution footprint and investing behind our strong brands. We remain laser focused on capturing gross GPIP savings and in fact, our teams are targeting incremental savings for 2022. Randy will highlight that in more detail later on. Our new operating model and deliberate investments behind our business units over the last few years have built a stronger and much more resilient company and we continue to expect long term growth. Now moving to Slide eight, our balance sheet this quarter improved sequentially ending the quarter with net leverage of 3.2 times and over and maintaining over $860,000,000 in total liquidity.
Our actions earlier this quarter to refinance our debt are expected to reduce our annual interest expense by $18,000,000 a year. As a reminder, we issued $900,000,000 of total debt with a mix of Term Loan B and a new ten year three and seven senior notes, which will lower our cost of capital. As announced in April, we are very excited to add the recent acquisition of Rejuvenate to our portfolio. Rejuvenate is a leading developer and marketer of household cleaning products, maintenance and restoration products with an incredible loyal following. We expect the transaction to close in the third quarter and this fits perfectly with our company's strategy to make living better at home and it adds a fourth category to our Home and Garden business unit.
I want to extend a big welcome to the Rejuvenate team as they join our family here at Spectrum Brands. I'm confident in our ability to create tremendous value together. Turning to Slide nine, going forward our capital allocation priorities continue to focus on one, allocating capital internally to our highest return opportunities and this includes strengthening our brands through consumer insights, research and development, innovation and advertising and marketing to drive vitality and profitable organic growth. Two, we plan to return cash to our shareholders via dividends and opportunistic share repurchases. Third, disciplined M and A with tuck in strategic acquisitions that are synergistic and help drive value creation.
We will continue to target a net leverage ratio in the three to four times range. Now you'll hear more from Jeremy on the financials and Randy will give you an update and additional business insights. Over to you, Jeremy.
Speaker 4
Thanks, David. Good morning, everyone. Turning to Slide 11 and a review of Q2 results from continuing operations, I'll begin with net sales. Net sales increased 22.6% excluding the impact of $18,000,000 of favorable foreign exchange and acquisition sales of 26,800,000 organic net sales increased 18% with double digit growth across all four business units. Gross profit increased $75,100,000 and gross margin of 35.1% was in line with a year ago, driven by higher volumes in all business units, improved efficiencies from our Global Productivity Improvement Program and favorable mix, offset by higher freight and input cost inflation and last year's retrospective tariff exclusion benefits.
SG and A expense of $262,200,000 increased 13.1% at 22.8 of net sales with the dollar increase driven by the improved volumes, higher advertising and marketing investments and incentive and distribution costs. Operating income of $116,800,000 was driven by improved volumes, improved productivity and lower restructuring costs, partially offset by input cost inflation, marketing and advertising investments and incentive costs. Net income and diluted earnings per share were primarily driven by the operating income growth and favorability from Energizer investments offset by higher debt refinance costs. Adjusted diluted EPS improved to $1.76 driven by operating income growth along with lower shares outstanding. Adjusted EBITDA increased 28.8% from the prior year, primarily driven by growth across all business units.
Turning to Slide 12, Q2 interest expense from continuing operations of $65,500,000 increased $30,000,000 due to the debt refinancing costs. Cash taxes during the quarter of $11,900,000 were $4,400,000 lower than last year. Depreciation and amortization from continuing operations of $38,700,000 was $2,300,000 higher than the prior year. Separately, and incentive based compensation decreased from $14,600,000 last year to $8,500,000 this year, driven by the change to incentive compensation payout methodology we talked about last year. Cash payments for transactions were $3,100,000 down from $6,000,000 last year.
And restructuring and related payments were $7,600,000 versus $12,800,000 last year. Moving to the balance sheet, the company had a cash balance of $290,000,000 and approximately $577,000,000 available on its $600,000,000 cash flow revolver. At the end of the quarter, total debt outstanding was approximately $2,600,000,000 consisting of approximately $2,100,000,000 of senior unsecured notes, dollars 400,000,000 of term loans and approximately $159,000,000 of finance leases and other obligations. Additionally, net leverage improved sequentially and was approximately 3.2 times. During the quarter, we sold off our remaining Energizer shares for proceeds of 12,600,000.0.
Capital expenditures were 16,200,000.0 in q two versus 13,000,000 last year. Turning to slide 13 and our updated earnings framework for 2021, we now expect mid teens reported net sales growth in 2021 with foreign exchange expected to have a positive impact based on current rates. Adjusted EBITDA is also expected to grow mid teens. This includes benefits from higher volumes, our GPIP program, approximately eleven months of results from the recent Armitage transaction in Global Pet Care, offset by net tariff headwinds of about $30,000,000 to $35,000,000 driven by the expiration of previously disclosed retrospective tariff exclusions in 2020. In addition, as David mentioned, we have also now factored in 120,000,000 to $130,000,000 of input cost inflation compared to a year ago.
Fiscal twenty twenty one adjusted free cash flow for continuing operations is now expected to be between $260,000,000 and $280,000,000 up from the previous range of $250,000,000 to $270,000,000 This includes plans for incremental investments and inventory levels as well as the expected input cost inflation. Depreciation and amortization is expected to be between 180,000,000 and 190,000,000, including stock based compensation of approximately 30,000,000 to 35,000,000. Full year interest expense is now expected to be between 130,000,000 and $135,000,000 This meaningful step down compared to our prior range in last year is driven by our successful $900,000,000 refinancing in February of our senior notes due 2024 and partial refinancing of our senior notes due 2025. On a full run rate basis, as David mentioned, we expect annualized savings of approximately $18,000,000 Restructuring and transaction related cash spending is now expected to be between 70,000,000 and $80,000,000 Capital expenditures are expected to be between 85,000,000 and $95,000,000 And cash taxes are expected to be between 35,000,000 and $40,000,000 and we do not anticipate being a significant US federal cash taxpayer during fiscal twenty twenty one as we continue to use net operating loss carryforwards. We ended fiscal twenty twenty with approximately $800,000,000 of usable federal NOLs.
For adjusted EPS,
Speaker 5
we use a tax rate
Speaker 4
of 25 including state taxes. Regarding our capital allocation strategy, we continue to target a net leverage range of three times to four times adjusted EBITDA. As it relates to our 2021 earnings framework, please keep in mind just a few factors. First, we continue to plan for incremental advertising investments of over $20,000,000 in fiscal twenty twenty one as we continue to raise awareness, consideration and purchase intent with consumers. Second, recall that Q4 results this fiscal year will have six fewer selling days compared to the prior year.
It's important to recognize this modeling nuance. Third, we continue to manage through inflationary pressures which are currently expected to be 120,000,000 to $130,000,000 higher than the prior year. And fourth, adjusted EBITDA is also expected to be negatively impacted by the absence of Energizer dividend income. Now to Randy for a more detailed look at our operations.
Speaker 5
Thanks, Jeremy, and thank you all for joining us
Speaker 4
this morning.
Speaker 5
My comments today will focus on reviewing each business unit to provide detail on the underlying performance drivers of our operating results. And I will also update you on the current overall cost environment, progress on our GPIP program and results from our commercial operations team in e commerce and marketing. Overall, we continue to see significant benefits from our operating model transformation as well as the addition of new talent in many key strategic roles. Q2 reflected another quarter of exceptional financial results with strong improvements across all four businesses. With the backdrop of elevated demands, this quarter reflected generally improved supply chain performance and consistent service levels despite continued industry challenges.
These efforts, in addition to our continued commercial investments, helped drive another quarter of double digit sales and adjusted EBITDA growth. Now let's dive into the specifics of each business. Starting with Hardware and Home Improvement on Slide 15. Second quarter reported net sales increased 18.4%, and organic net sales increased 17.4%. Adjusted EBITDA increased 5.6%, primarily driven by positive volumes and productivity improvements that were materially offset by last year's significant benefit from retrospective tariff exclusions as well as higher freight and input cost inflation, distribution costs, COVID-nineteen related costs and higher marketing investments.
Excluding last year's tariff exclusions, adjusted EBITDA improved 20.1%. This represents another quarter of strong double digit growth within HHI. While inventory levels are improved and have normalized over the last few quarters, demand continues to outpace supply with continued strong consumer demand for our products. This bodes well for our third quarter, especially as we are lapping last year's government mandated shutdowns in three of our manufacturing facilities throughout Mexico and The Philippines. We expect continued demand increases throughout the balance of 2021 driven by our new product introductions and incremental advertising investments.
Fundamentals across both the repair and remodel segment as well as the new build channels continue to be strong. In our QuickSet business, we are focused on driving demand for MicroBond, which incorporates antimicrobial technology on the surface of our hardware. Also, smart key technology, which allows users to rekey their own locks to any QuickSec key in about fifteen seconds. And finally, exciting Halo Touch Smart Lock product, which includes biometric and Wi Fi enabled technology along with voice assist capability through Alexa and Google Assistant. As an example, the QuickSet team recently partnered with long standing customer, Shay Homes, to begin installing Halo touch locks on every new build as a standard home feature.
This and other similar wins with the Halo platform are encouraging as we believe home automation trends will continue to drive sales for our electronics and smart connected locks. Additionally, our Baldwin brand, which is a leader in luxury security products, launched a new quick ship program this quarter with a wide array of SKUs shipping within five business days dramatically improved the customer experience. Finally, I'm also pleased to announce that Tim Goff accepted the role of President of HHI in March. Tim is one of our top strategic leaders and most recently served as the Head of our Commercial Operations Group, where he captained the transformational benefits that team has had on the new SPV operating model and business results. Tim knows the HHI business very well, having previously served as the Chief Marketing Officer and holding other supply chain, operational and sales leadership roles over the years.
We look forward to sharing more details over the coming quarters as Tim and the HHI team look to build on our leading market positions in Spectrum Brands' largest business unit. Now to Home and Personal Care, which is Slide 16. Reported and organic net sales increased 2824.3%, respectively. Adjusted EBITDA more than doubled to $25,400,000 Net sales were driven by continued strength in small kitchen appliances and personal care categories as well as growth across all regions. E commerce sales, both in pure play and retailer.com channels, continued to grow at a high rate.
EBITDA was driven by higher volumes and productivity improvements, partially offset by increased freight and input cost inflation and continued marketing investments. Q2 represented the seventh consecutive quarter of year over year top line growth as momentum for our home appliances and personal care products continued well past the successful holiday season. We've seen incremental demand in The U. S. From recent stimulus spending and our fill rates continue to improve.
This bodes well for our plans to continue to grow sharing and shelf space with our key retailers. However, when modeling this business, please keep in mind inflationary headwinds within Home and Personal Care. We expect our pricing and supplier partner initiatives will only partially offset the second half headwind. As a result of these factors, we currently expect margin pressure in the second half, and we'll continue working to mitigate the inflation throughout the year and into fiscal twenty twenty two. Our focus on 2021 and beyond will remain on consumer led, insights driven new products.
We will continue to drive those investments in our brands across more markets than ever before. Moving to Global Pet Care, which is Slide 17. Kitchen represented another strong quarter of financial performance, reported net and organic sales growth of 23.910%, respectively. Adjusted EBITDA grew 39%. Top line growth was driven by both our aquatics and companion animal categories, with broad based demand across subcategories and channel partners.
Higher EBITDA was driven by volume growth and productivity improvements, partially offset by higher inflation and distribution expenses as well as advertising and marketing investments. Q2 was also the tenth consecutive quarter of year over year top line growth and eighth consecutive quarter of bottom line growth as our existing legacy brands and recently acquired brands all performed well in their categories. Our Global Pet team continues to build its worldwide market leadership position in the core categories of aquatics, dog shoes, pet grooming and pet stain and odor. You'll recall that we added Omega C as an acquisition last year to advance our premium aquatics offerings. And our addition of the Armitage Pet Care team earlier this year is an excellent platform for international expansion, not only our dog chews business, but also cat chews, treats and toys.
As we've said before, our global pet care team remains confident that 2021 and beyond will benefit from the continued execution of our global strategies coupled with the very strong category growth fundamentals. In particular, we anticipate sustained demand for our high margin consumables given all the new pet parents and companion animal and all the new hobbyists who have recently entered the aquatics and reptile categories. These are long term commitments and bode well for the future demand of our products. And finally Home and Garden, which is Slide 18. Second quarter reported net sales increased 21.4% and adjusted EBITDA increased 22.7%.
Top line again grew across controls, household insecticides and repellents with strong early season orders across all channels. EBITDA increase was driven by volume growth, favorable mix, productivity improvements partially offset by advertisement and marketing investments and higher distribution expenses. We believe both Spectrum Brands and our key retailers are very well positioned as we enter Q3, which is historically our largest quarter for sales and profitability. Q2 reflected another quarter of improved production capabilities to meet continued high levels of demand, which results in heavier inventory positions at retail compared to prior year. Spring is just starting in much of The U.
S, which kicks off our selling season for controls and repellents. We are seeing good early quarter POS performance. The weather and thus the resulting POS performance in our peak season remains an unknown variable. We are very well positioned to maximize our results this year despite ongoing challenges from input and freight markets. We're also very excited about the anticipated acquisition of Rejuvenate, a leading household cleaning, maintenance and restoration product company.
Rejuvenate has a loyal customer following and has generated impressive top and bottom line growth. Product category is centered around floor care as well as disinfectants in kitchen and bath. Last year's net sales were over $60,000,000 with growing sales and margins over the past three years. We are confident in our ability to capture operational and revenue synergies with a business that has strong EBITDA margins and customer alignment with our existing channels. The transaction is planned to close during the third quarter, but we look forward to applying our strengths in manufacturing, marketing and sales to further strengthen the Rejuvenate brand, particularly within underpenetrated retailers.
Our continued A and P investments this quarter are consistent with our strategy to invest more resources to tell our story around brands such as Spectracite, Cutter, Hotshot and Ecologic, along with incremental research dollars to deliver even more new and innovative products. We believe these actions will further enhance our mission to be a recognized market leader in providing consumers the best solutions to conquer nature's challenges and enjoy life. Is possible with our distinctive combination of brands, formulations, registrations supported by efficient manufacturing and strong customer relationships. The fundamentals of this business remain very strong with solid profitability and high barriers to entry. We're confident that our strong brand equities and increased investments in product development and marketing will accelerate long term growth rates.
Now let's turn to our internal growth and efficiency efforts with our global productivity improvement program, which is on Slide 19. As David mentioned, we remain laser focused on the execution of our key initiatives in this program as Q2 delivered productivity enhancements across all business units. We remain resolute on using the savings to reinvest back into business to deliver long term sustainable organic growth. This program continues to be our most important strategic initiative as we transform to our new global operating model. Our F-twenty one savings are running ahead of previous projections, and we are now raising our total gross savings target of $150,000,000 to at least $200,000,000 by the end of fiscal twenty twenty two.
Our confidence in raising this target is driven by strong performance from our teams and expanded scope of our existing program initiatives. As David and Jeremy noted earlier, inflationary headwinds while second half weighted, did begin to impact our business in this quarter. During our call last quarter, we indicated these headwinds were 70,000,000 to $80,000,000 higher than we had originally planned for the year, or in other words, dollars 100,000,000 to $110,000,000 higher than fiscal twenty twenty levels. Based on current rates as well as our improved expectations for top line growth for the year, these inflationary headwinds are now expected to be $120,000,000 to $130,000,000 higher than fiscal twenty twenty levels. During the quarter, we actively addressed these headwinds with a coordinated and consistent strategy utilizing many the tools developed through our GPIP program.
We are working in concert with our supplier partners to offset this inflation and have additional mitigation actions in many areas such as ocean freight and supplier management. The agreed upon price increases with our retail partners are going into effect calendar in Q3 and are expected to continue to step up during Q4. And additionally, we anticipate further pricing discussions being necessary in the back half of the calendar year. We believe at this point that some of these inflationary pressures likely temporary in nature may begin to moderate in fiscal twenty twenty two. As Jeremy alluded to earlier, these headwinds are currently included in our earnings framework for the year and we will remain vigilant with our operating discipline to maximize the long term performance of our brands as a result of this.
And finally, our commercial operations team continues to drive impressive results. This quarter, e commerce grew by nearly 43% and represented more than 16% of our total net sales. Additionally, our digital teams continue to leverage data for the early identification of consumer trends to see new product and sales opportunities and create promotional content that appeals to those consumers. In my section, I want to acknowledge another sensational quarter of progress in our operating culture and our strategic initiatives and to thank our more than 12,000 employees for all they are doing to make us a better, faster and stronger Spectrum Brands. Now back to David.
Speaker 2
Thank you, Randy. Thanks, Jeremy. Thanks, everybody, for joining us today. Earlier this year at CAGNY at the Investor Conference, we shared our Spectrum Brands mission, which is we make living better at home. And as I shared earlier, we are a more efficient, focused, productive and consistent operating company.
Given that we've covered a lot on the call, let's conclude with a few takeaways on Slide 21. First of all, our second quarter financials reflect another excellent quarter of top line growth, Investments in marketing and advertising for our trusted brands were higher in each division, which helped drive double digit top line growth across all of our business units. Second, our second quarter financials reflect another quarter of operating leverage with adjusted EBITDA increasing 28.8% from the prior year with growth across all businesses. Thirdly, our balance sheet improved sequentially, ending the quarter with net leverage of 3.2 times with over $860,000,000 in total liquidity. Additionally, our successful debt refinancing actions this quarter are expected to drive a material step down in our interest expense.
I again want to thank all of our employee partners, from our frontline workers in the factories to the distribution centers to the many other teams around the world that have been working from home. I'm extremely grateful for all the sacrifices you have made to navigate our company successfully through these challenging times. Thank you again for your time and for your continued support. I'll now turn the call back over to Kevin for any questions that we have on the line.
Speaker 1
Thank you, David. Francis, let's just dive right into Q
Speaker 0
Your first question comes from the line of Nick Modi from RBC Capital. Your line is now open.
Speaker 6
Thanks. Good morning, everyone.
Speaker 5
How
Speaker 6
are doing? Just a couple of quick questions. Just on the GPIP program, with the increase, can you just provide us any detail on kind of how the flow through will be for the rest of this year, but also next year, just so we can understand how to think about the modeling from that standpoint? And then REJUVENTATE in your guidance? I was unclear if you guys have included that in your actual framework.
Speaker 2
Yes. Go ahead, Jeremy.
Speaker 4
Yes. So Nick, given the
Speaker 5
we don't have pinpoints in terms of
Speaker 4
the timing of closing on Rejuvenate, so we did not include it in the current earnings framework. And on the first question, I'll start, maybe Randy will
Speaker 5
have some more color. I think we talked about, as
Speaker 4
we started the year, an incremental $60,000,000 in savings from GPIP, most of which we expected this fiscal year on top of the $90,000,000 that we'd already had as we started the year. As Randy mentioned, we're a
Speaker 5
little bit ahead of that. So I think we'll be a
Speaker 4
little bit more than that $60,000,000 this year with the rest of the increase flowing into next year. Again, talked about a little bit better savings on existing initiatives and adding some additional scope. Randy, if there's any color you want to add?
Speaker 5
I think that covers it well, Nick. Little heavier maybe this year than next, but I think Jeremy covered it.
Speaker 4
Yes. Obviously, that's excluding that's gross. That's excluding the inflation that we're experiencing.
Speaker 6
Okay. And then just one question, Randy, or maybe David can answer this as well. The housing market obviously has been on a tear, but it looks like inflation in terms of home prices has gotten pretty high. And there's some concerns about affordability. I'm just curious kind of the Spectrum Brands take on that end market.
Speaker 2
Look, view on that, and I've been talking to a few economists during this week as we prepared for this public earnings call is we continue to see strength in the housing sector. And quite frankly, I think the new administration's policies are going to move cash flows quite frankly to the customer base that we have at Spectrum Brands kind of across the board. Yes, clearly housing has had a good run, but I think that I think what there's a couple of components here. I think during COVID-nineteen, people have expected, hey, there's a lot of pull forward in a business like ours. I would say at this point in time, what we've talked about in prior calls is there's some real stickiness that is going to benefit businesses like Spectrum Brands for a very long time.
We've talked about pet adoption. That's a material commitment with a lot of duration. Buying a house with a yard, moving to the suburbs. People generally, the first thing they do is change that lock. And so our hardware division is really an R and R.
It's a renovation business, replacement business. And that's 70%, 75% of our business. And quite frankly, we continue to see a lot of homebuilding activity, particularly Sunbelt, other places. I've been out personally to some of these sites and they're sold out for a year or two years, but there's a lot of shovels going into the ground. There's a lot of projects going on.
And we quite frankly are pretty bullish because we've strengthened our management team. They're upgrading talent there. We're launching a lot of new products in that hardware division. And so we have a very constructive outlook all in all for HHI over the next twelve, twenty four months.
Speaker 6
Excellent. I'll pass it on. Thanks guys.
Speaker 5
Thanks, Nick. Your
Speaker 0
next question comes from the line of Chris Carey from Wells Fargo. Your line is now open.
Speaker 7
Hi, good morning, everyone.
Speaker 5
Good morning, Chris.
Speaker 7
So I wanted to pick up on that line of questioning, but perhaps from a bigger picture perspective, right? So it sounds like you think HHI tailwinds can continue into fiscal 'twenty two, in other words, that we're at a new base. I wonder if you could maybe just talk to maybe the broader portfolio and the types of things that you think might be helping you now, which won't necessarily help you in fiscal 'twenty two. Stimulus checks for the Appliances business comes to mind. Pet seems like it's at a new base.
So would you expect to grow off of this new base? You're seeing some strength in areas like aquatics, which is not typical companion animal, makes sense to me. Garden, that makes sense that you have a new home and you want to take care of your front lawns and everything associated. And I guess what I'm getting at is that this year has just been so strong so far. And I think that eyes are going to start looking at the fiscal 'twenty two.
And if you just think about the divisions that you think can sustain growth or the specific businesses and those that might reverse and basically whether you think you can still deliver organic sales growth off of what is going to be a pretty atypically strong base this year? So any sort of broader portfolio perspective would be very helpful for me.
Speaker 2
Look, I'll be very blunt. I think this is what Wall Street has wrong. I think Wall Street is projecting very flat numbers for us in the next two, three years. And I don't see that. And your comment around stimulus checks is a good one because it's almost like a direct injection to a vein.
It impacts the ecosystem very fast. And so you're not wrong that when stimulus checks go out, we see big POS in certain sectors like our appliance unit. But if you look at what the current administration is proposing in both the family plan and the infrastructure plan, it is effectively a redistribution of cash flows to our very consumer base. And so look, I believe that the other structural change here is that as we deal with going back to work through the summer into the fall, not everyone is going to return to work. There's going to be a lot more flexibility in the workforce in this country.
And people are going to continue to work from home part of the week. And they want that home to look good. And that's the exact reason why you see aquatic sales going up when they didn't in the past because it's a it's a beautiful thing to have in the house. It's it helps relieve stress. The kids love it.
And so I do think there are some real structural changes that have occurred through this pandemic period. And then as you go into this new administration's policies and you dig into it, I think, look, I think the next three to six months, the economic data is going to look a little crazy. You've got very easy comps on inflation because last year factories were shut down and you didn't the economy was dead. You've got stimulus checks going out now, you got tight supply, people are coming out of their homes, velocity of money is going up. But depending on what you think the chances of an infrastructure bill passing are and the family bill passing, You know, are these are real movements of cash over time, granted a ten year period, that are gonna put money in the pockets of our main consumer base.
And so we'll see. I'm not a politician. I'm certainly not an economist. But I think that we believe that not only are we taking share, not only building a much healthier, durable, resilient company, But we've made a lot of we've done this team of 12,000 people has done a lot of very hard work to reposition ourselves as a player that wants to be number one. We don't want to be number two anymore, we want to be number one.
We want the best R and D, we want the best innovation, we want the best marketing. It's a very different culture and it just so happens that that is starting to pay some dividends And it's also coinciding with, I think, some favorable structural dynamics that will sustain our growth well past this year.
Speaker 7
Okay. And then just as a follow-up. David, you certainly have a long history and track record with doing deals. Yes, I wonder if you can just provide a bit more perspective on the Rejuvenate acquisition. Certainly, Cleaning had a good year in 2020.
And just how you're thinking about delivering growth in this business, whether distribution opportunities, whether taking incremental market share. And then just connected to that, the synergy expectations that you think you can get from this business from a margin standpoint and how that's factored into your decision process to acquire the business? Thanks for that.
Speaker 2
Yes. Look, mean, I'm going touch on it, but I'm going to hand that over to Randy. I mean, look, there's we clearly have phenomenal expertise, core competence in manufacturing liquids. Household cleaning is a space we like. We want to be bigger.
And this acquisition. The company is relatively small. Your comp you answered your own question, 100% we can get additional retail distribution. I think we can innovate the product and we can make the product better. And quite frankly, I think we have a lot of stuff in our portfolio.
We have a lot of ideas around innovation, new product launches that will further accelerate that. So it's very much a plug and play with, yes, tremendous synergy coming into the Spectrum family, but it's a growth play. Relative to competition, this is a very small asset. And if we can be good stewards of it, I think it can be a meaningful earnings driver for us in the next three, five, ten years. Randy, you want to chip at that?
Speaker 5
Yes, Chris. Mean, David hit most of the key points here, but we really like the brand. It allows us to jump into a space that we've coveted for quite a while and do it from a position of strength that fits well within our portfolio and our new objectives, as David said, to be number one in the areas in which we compete. We've got substantial benefits in our selling capabilities in a lot of underdeveloped channels for this business. We've got a lot of opportunities to meld our existing innovation delivery systems, formulations, etcetera, to continue the innovation that Rejuvenate has demonstrated.
And we think there's a fair amount of cost synergies associated on the product side that we can continue to drive forward to keep the top line moving.
Speaker 7
Okay. Fair enough. Thanks.
Speaker 5
Thanks, Chris. Thank you, Chris.
Speaker 0
Your next question comes from the line of Karru Martinson from Jefferies. Your line is now open.
Speaker 8
Good morning. When you guys talked about demand outstripping supply, where are the bottlenecks? And what can you do in the near term to alleviate those?
Speaker 2
Yes. Mean, we've got the ships anchored offshore that we can't get into port. We've got some containers or they're stocking boats too high and the containers are falling in the ocean. You had the Suez issue, we got eight containers on that. I mean, it's an everyday battle.
But we've got our fill rates up and we've built a much more resilient supply chain and we continue to serve our customers. Mean, look, I think we're sitting here and we're looking at kind of a I think it's transitory. I think we solve the bottleneck as we get into the early maybe 2022. But every day is a lot of hard work on the supply chain till then. But our company, our teams, our sourcing teams, our supply chain teams are doing a fantastic job.
And so it's really it's not an availability issue to our company, thank God. It's just higher expense right now. And it's going to hurt us. It's a headwind. We're facing into it.
But I do think it's transitory. I do think we get through it as we get into the early part of next calendar year. Jeremy, Randy, any
Speaker 5
I think one of the things that we want to point out is that we have a lot of businesses that are pretty vertical in the supply chain. And our operations are all running at full output based upon availability of transportation and some limited components. So it's not an internal issue. Mainly as David mentioned, we're working with our providers to get through the global transportation kind of backlog. And we see it getting better each month, each week, and anticipate it continuing to do so into the fall.
Speaker 8
And then when you guys talk of taking price here in the third quarter, we've been hearing that inputs are certainly easier to price. They're always all over the headlines. But the freight and the shipping has been harder. Are you getting that full price? And are you seeing the industry follow?
Speaker 5
Well, it's a very dynamic situation. It varies channel, by category, by business unit. And so I can't give you a blanket answer, but I would tell you that we are attacking it from the standpoint of both transportation and freight as well as input costs. I think all of us feel that, you know, transportation ultimately will work itself out over time. And we're taking some unique pricing approaches there with our partners.
And we are having, you know, success in that space. So it's gonna continue to be a very important thing for us to manage well for the next several quarters as well as everybody in the space. But we feel good about how we're approaching it.
Speaker 8
Okay. And just lastly, last year, weather wise, Garden had almost the perfect season. Is that a bit of a headwind for you guys here in the back half? Or is just the continued strength of that at home customer going to overwhelm that?
Speaker 5
So the overall dynamic of the category, I'm very pleased with. I have been in this particular piece of the business for most of my career in Spectrum Brands. And tell you, I've never felt better about our ability to compete. With regards to what the weather impact's gonna be on the season, I will I will tell you about that on the November call because I've never been able to figure it out how to predict it at this point. So our strategy is always to go in in the best position we can to win the game that ends up being on the field, and I feel like we are poised to do that extremely well.
Speaker 8
Thank you very much, guys. Appreciate it.
Speaker 2
Thanks, Drew.
Speaker 0
Your next question comes from the line of Faiza Alwy from Deutsche Bank. Your line is now open.
Speaker 9
Yes. Hi, good morning.
Speaker 5
Hi. So
Speaker 9
I guess I wanted to directly ask the question on it seems like as I look at your earnings framework, you're assuming better growth in the back half on both on at least on revenue. And I'm curious if there's a particular segment or categories that's making you more optimistic. And I'm thinking in particular about HPC because I mean, was very surprised by those numbers. So I'm curious of how you're thinking about generally in that particular business specifically.
Speaker 4
Yes. So I'll start. So I mean, if you look at our first half results, you're essentially growing 20% range, and we're implying for the year mid teens on net sales. So that implies a slowing of the growth rate. It's going to be a little bit different business by business given the oddities of fiscal twenty twenty.
So if you recall, Q3 last year for our HHI business in particular was very challenging on supply. So they were down 20% plus. In Q4, it was the exact opposite where they caught up. So it'll be a little bit different business by business, but we do expect a moderation in the growth rate from the first half rates that we experienced in that earnings framework. As it relates to HPC, fair point, obviously a very good quarter, frankly higher than we expected as we started the quarter.
But POS has continued to be good. David and Randy both mentioned some benefit from stimulus likely in there as well. And perhaps some benefit, frankly, from people starting to go back to work or starting to travel again, particularly in the Remington areas of groom and shave.
Speaker 9
Okay. That's very helpful. Makes sense. And then I guess, you know, your comments around, like, the Rejuvenate brand loyalty and just it's making me wonder and think about your existing brands. I know you've talked about reinvestments.
And I'm curious if there's any brand metrics or any we've seen the great sales, right? But is there anything underlying that? Can you talk about whether it's loyalty or just any other brand metrics that you can share around sort of where you've seen the most improvement, I guess, over the last couple of years?
Speaker 5
So Faiza, we probably won't want to get into the specific metrics. But I can comment that we watch them very closely. And across the board, we're seeing positive responses to our reinvestment strategy. And we're using that on a monthly basis to continuously adjust and redirect the flow of investments. And right now the great news is that all categories, all business units are seeing net positive movement in awareness, consideration, trial, and commitment.
And so it's a really exciting time to be part of the strategy. I hope that helps.
Speaker 9
Yes. Thank you very much.
Speaker 4
Thanks, Sajid.
Speaker 0
Your next question comes from the line of Bob Labick from CJS Securities. Your line is now open.
Speaker 10
Good morning. Congratulations on another great quarter. Yes, I just wanted to talk, I guess, a little more about the mitigation efforts for the material headwinds in terms of you talked about price a little bit. On the supply side, can you tell us kind of what you're doing there? And then I guess thinking through just to next year in terms of the pricing, are these permanent price increases?
Are they kind of surcharges? Or if raw materials and freight normalize, how does the pricing of the products change going forward?
Speaker 5
Great questions, Bob. So what I would say on the mitigation, it's all about optionality. So it's really about working with your suppliers, your strategic relationships, trying to get the most out of that, how you can value engineer your products, how you can adjust in other ways that don't impact the value to the consumer. But it's also around optionalities for other relationships or other suppliers. The great news for us is that we've been doing nothing but gathering and leveraging that data for the last two and a half years.
So the biggest piece of our GALILEO or GPIP savings that's driving the investment has come from the area of cost of goods sold. And so all the process work that was done behind that to prepare for that and drive that through successful project was based around very detailed data oriented optionality. So we had the playbook ready to go and the organizational muscle memory around all of those activities. And so that's what's helping us with mitigation. With regards to pricing, you hit on all the topics we're working.
So we're trying to be very transparent with our retail partners. With our the investments that we've had and the brand momentum that we have has put us in a good position in these conversations where we're able to go in and work together to try and drive the best outcome for our retail partners and categories. And so in areas where we believe there's transitory costs, we are working on programs with surcharges that would abate. In more normal input cost areas, we're taking more permanent pricing. But there's no such thing as permanent pricing.
So it will always be a point of discussion that we're having with our partners constantly.
Speaker 10
Got it. That's really helpful. Thank you. And then, you know, as it relates to REJUVENTATE, don't know if it's too soon to say or not, but is there an opportunity to kind of in source to your St. Louis facilities to manufacture there?
And if so, is there enough capacity? Or is there additional capital needed for that?
Speaker 5
Yes. It's an obvious area that we're focused on, and we don't know enough about all the details on the other side yet, the deal having not closed. But what we do know, as David said, is this is a bread and butter competency for our Home and Garden business. And we believe that whether production moves from where it is now or not, we believe we're going to have a positive ability to improve the quality and the cost structure of that business.
Speaker 0
Your next question comes from the line of Ian Safino from Oppenheimer.
Speaker 3
Great. Just one more inflation question since you guys probably haven't gotten enough of them. On on, you know, offsetting this, I mean, typically, I guess, with with tariffs, you are usually looking for, a 70 to 75% recovery through pricing, maybe a 25, 30% offset from like supply chain price release. Is that something similar we should expect as you kind of try to offset inflation in this environment? Or would the mix maybe change a little bit?
Speaker 4
Well, I think we're not going to get into specifics on pricing and dollars out there. I think, as Randy said, being transparent with our retail partners and approaching it as a partnership, approaching it from multifactoring between surcharges, price increases, being very conscious of the impact on POS and the brand momentum that we have is the most important thing to us, particularly when, as David said earlier, we do expect at least some portion of these inflationary issues to be somewhat transitory. So, you know, we wanna be really smart about the impact in POS and the momentum that we have. You know, getting into specific percentages or dollars on on in this environment is probably not the best thing for us to do, Ian.
Speaker 3
Okay. Understood. And then maybe asking about the repurchase authorization you guys announced. What kind of cadence should we expect? Is this a signal maybe that there's not as many acquisitions out there?
Are they not mutually exclusive? Just a little bit of color on that would be helpful. Yes.
Speaker 2
So we had $1,000,000,000 program in the past. I think we used about $600,000,000 of it. That was due to expire. I like the optionality of being able to buy in our stock. And so I asked the Board to give me another $1,000,000,000 to buy back our shares.
Look, it's a three year program, but I continue to tell you that even though our stock is starting to react favorably to what I believe is a lot of fundamental work to drive long term value creation, it's still I believe our stock is undervalued right now. And our company is starting to generate higher and higher levels of free cash. External acquisitions remain pricey. And it's nice to have the ability to buy in the $300,000,000 stock a year hypothetically or more. So look, we'll let you know after it's done.
But we want to manage our leverage in this context. We've got a couple of tuck ins we need to close and integrate. And as I look out, I think our share price is very attractive for us to continue to repurchase.
Speaker 6
All right, great. Thanks for the color. Good quarter.
Speaker 4
Thanks Ian.
Speaker 0
Your next question comes from the line of Carla Casella from JPMorgan. Your line is now open.
Speaker 11
Alan, on your last comment, you mentioned that your stock is undervalued. I'd also argue that your bonds are underrated, and, you were brought S and P took you down during the pandemic. Any conversations you've had with the rating agency? And do you have a rating target? Or do you want to get to BB or investment grade at some point?
Speaker 2
Well, I agree with you with BB. Getting the rating agencies to agree is, I guess, requires a few more follow-up calls. But look, I think what probably think is what you see right now is I think on the ratings front, we've got two really good things going on, right? We've really got EBITDA on a nice growth trend. What we're trying to signal is, look, we want to continue to under promise and over deliver.
We don't want to get out in front of our skis, but the reality is we're winning and we expect to keep winning. And so we just we've got some trend, we've got some inflation, we've got a few things here in the back half of the year that we want to point out openly. But we're generating higher and higher levels of EBITDA and I expect that to continue as we go into 2022 and beyond. So that obviously drives the leverage ratio down, improves interest coverage, etcetera. We've also just done a refi, which is materially lowering our cost of carrying our debt.
And so as that interest expense drops, the free cash flow really expands. And so I think we've become a more exciting free cash flow story as we get into 2022 as well. And so all those things, you know, created, you know, created dynamic and and positive trajectory for our for our for our credit profile and and then, you know, hopefully, you know, get the rating agencies to agree. But, yeah, let's let's see where we go. Jeremy, any color?
Speaker 4
Yeah. But, obviously, we have ongoing conversations with the agencies, Carla, and and good relationships. I think, you know, you're as aware as anybody on the call, if you go back a year ago, the agencies in general were very, very cautious and conservative in the pandemic. And so I think the recent actions we've had to move from a negative outlook to positive is a good start. But I think they were a little bit entrenched in that cautious approach, having been burned in the past.
And so we understand that. I think like David, I like operating in the BB world where execute more at the investment grade type terms and covenants. I think high yield investors understand us really well. I think we're comfortable operating where we are.
Speaker 11
And just one follow-up. I know you took out some of your debt or refinanced this year. You've got one more piece of somewhat high cost debt in the structure. Any thoughts about either further refinancing? Or would you just consider paying down with cash and free cash flow?
Speaker 2
Yes, mean, look, we're always paying attention to the markets. Obviously, when something gets closer to the call premium dropping to par, that gets more exciting. It does appear that the interest rate outlook will remain low for a while. But yes, look, current intent right now is to generate free cash flow, pay down debt. That is and that is nice that we had zero bank debt in our cap structure before the recent refi.
Now obviously, we have some prepayable debt at par. But look, your observation is accurate that we still have some paper out there at a high coupon and we can it's a wonderful thing to be able to look into the future and say, Jeremy, Randy and I can sit around the table and pull another lever to reduce interest expense further. So stay tuned and but we understand where you're going and we're watching it.
Speaker 11
Okay, great. Thanks.
Speaker 4
Thanks, Carla.
Speaker 0
From here, I would like to hand the call over to Mr. Kim for closing remarks. Go ahead.
Speaker 1
Thank you, Francis. Thank you, Francis. With that, we've reached the top of the hour. We'll also conclude our conference call. Thank you to David, Jeremy and Randy.
And on behalf of Spectrum Brands, thank you for your participation.
Speaker 0
This concludes today's conference call. Thank you all for participating. You may now disconnect.