Spectrum Brands - Earnings Call - Q3 2019
August 7, 2019
Transcript
Speaker 0
Good morning. My name is Michelle and I'll be your conference operator today. At this time I would like to welcome everyone to the Spectrum Brands Fiscal twenty nineteen Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' prepared remarks there will be a question and answer period.
As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, August 7. Thank you. I would now like to introduce Mr. David Pritchard with Spectrum Brands. Mr.
Pritchard, may you begin your conference.
Speaker 1
Thank you, operator, and welcome to Spectrum Brands Holdings fiscal twenty nineteen third quarter earnings conference call and webcast. I'm Dave Pritchard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today. Now to help you follow our comments, we have placed a slide presentation on the event calendar page in the IR section of our website at spectrumbrands.com. This document will remain there following our call. So if we look at the presentation and we start with Slide two, you'll see that the call will again be led by David Mora, our Chairman and Chief Executive Officer and Doug Martin, our Chief Financial Officer.
David and Doug will deliver opening remarks, and then we will conduct the Q and A session. If we turn to Slides three and four, you'll note that our comments today include forward looking statements, including our outlook for fiscal twenty nineteen and beyond. Now 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 08/07/2019, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10 Qs and 10 ks.
We assume no obligation to update any forward looking statement. Also, note that we will discuss certain non GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and eight ks filing, which are both available on our website in the Investor Relations section. So with that, I will now turn the call over to our Chairman and CEO, David Mora.
Speaker 2
Thank you, Dave, and I just want to thank everyone for joining us this morning. As our fiscal twenty nineteen draws to a close, I'm very proud of our associates here at Spectrum Brands as we are on pace to deliver the financial commitments we set about a year ago. And all of this despite headwind from tariffs, unfavorable weather in Home and Garden, distribution input cost increases across our business lines. Spectrum employees have risen to the challenge and they're delivering on our goal of a year of stabilizing solidifying our platform and positioning our company to resume growth in 2020. We have also materially improved our capital structure from a peak leverage ratio of 5.8 times in December 2018 to an estimated net leverage of 3.5 times or better as we exit this year fiscal year.
We expect to be in a very strong financial position with over $500,000,000 of cash and full availability under our $800,000,000 revolver. Additionally, during the fiscal year so far, we've repurchased over $250,000,000 of our shares, leaving us with $750,000,000 remaining under our buyback authorization plan. We continue to believe the opportunistic acquisition of our shares represents a high return on our capital. So far during fiscal twenty nineteen, including our recently declared dividend, we have committed to return over $330,000,000 of cash to our shareholders through share buybacks and dividends. On our second quarter call, we indicated we had undertaken a global analysis of our operating model and the objective was to identify potential performance improvements.
During the third quarter, we have moved from analysis into detailed planning and we've actually started the initial execution of what I'm calling our global productivity improvement plan. As we prepare to enter 2020, I'm actually thrilled that the teams are embracing our plan, which is expected to materially and permanently increase the operating efficiency and effectiveness of our company, while enabling growth investments in consumer insights, research and development and marketing. This is very much in line with our strategy to reinvigorate Spectrum Brands as a leading innovator, brand steward and low cost provider, delivering growth in earnings and free cash flow over the long term for our shareholders. If you could please move to Slide seven. As we enter the fourth quarter, while the businesses do face a number of headwinds, we've got inflation associated with input costs, we've got tariffs that are in the news almost every day, distribution logistic costs and some sluggishness in The U.
S. Housing market, we are affirming our full year adjusted EBITDA guidance of $560,000,000 to $580,000,000 and we expect to further improve leverage from net debt of 5.2 times last year to 3.5 times or better at this year end. As you will hear more details from Doug about our results, I'll simply focus my comments on how our teams across geographies, functions and business units are driving for vision, clarity and focus. Our competitive positioning in the marketplace continues to improve with incremental investments this year weighted toward our strongest brands. Our teams continue to innovate and enhance customer relationships.
For example, Home and Garden grew outdoor control volumes under the Spectracide brand by over 10 year to date and that's despite the unfavorable weather that we experienced in the May time period. On a multi year basis, we expect these brand investments to reach incremental customers and continue to grow share, while leveraging our world class manufacturing operations in St. Louis. In HHI, we are building on our number one brand position in the residential security markets by pushing innovation into the electronics category and our leadership position in the smart home connected market with the addition of Aura or a new Bluetooth enabled lock under the industry leading QuickSet brand starting this fourth quarter. This convenient upgrade from a mechanical lock system incorporates simple smart lock programming to allow for secure access in a number of ways.
One, through the QuickSet app, a coded entry feature, and you can use a traditional key. In our home and personal care results, reflected growth this quarter in Europe, and that was derived from innovation in core personal care product lines. And we have an entirely new leadership team focused on stabilizing the business here in The U. S, driving our core platforms and planting seeds for future growth. Clearly this quarter our global Pet Care business was the highlight.
Strong companion animal results reflected a combination of premium product category growth coupled with significant market share gains from our DreamBone and SmartBone product lines. In fact, in Nielsen track channels, our double digit growth in these brands is twice as strong as the overall category and we will continue to innovate with new flavors and line extensions to come. If I could have you turn your attention to slide eight. We continue focus on building a faster, smarter, stronger Spectrum Brands in the future. And after launching a detailed global productivity study, our teams have identified four primary areas of improvement.
These areas include commercial and go to market models, procurement, supply chain operations and G and A work streams, which we expect to unlock performance improvements as we continue to leverage our scale advantages, while further strengthening our customer and consumer relationships with strong brands, innovation and consumer facing marketing. During the quarter, the company invested approximately $20,000,000 into these new global productivity improvement plan initiatives. And we have executed already on $35,000,000 worth of sourcing savings. The majority of these will be realized in fiscal twenty twenty. We expect a substantial portion of these savings will be reinvested into R and D, marketing and technology enabling capabilities to drive growth and improve our cost position.
Our Spectrum 2020 guiding principles are vision, where we're going clarity, what we prioritize and focus, how we execute. This is our pathway to a consumer driven mindset, accepting nothing but outstanding quality and service while increasing innovation and marketing investments behind our brands. These actions are driving a culture of greater accountability, quicker decision making with an experienced and energized leadership team that has been refreshed with new talent and that are focused on operational excellence as we position our company for improved sales, earnings and sustainable free cash flow growth. With that introduction, I will now turn it over to Doug to go over the quarter.
Speaker 3
Thanks, David, and good morning, everyone. Turning to Slide 10 and a review of Q3 results from continuing operations beginning with net sales. Net sales declined 0.7% driven by unfavorable foreign exchange of 150 basis points, while organic sales increased 0.8%. Strong Global Pet Care sales were partially offset by lower revenues from Hardware and Home Improvement, Home and Personal Care and Home and Garden. Reported gross profit was down 0.5%.
Gross margin increased 10 basis points as positive pricing and productivity were partially offset by input cost inflation, tariffs and unfavorable product mix. Reported SG and A expense of two thirty three million dollars increased 4.3% or 22.8% of net sales this year compared to 21.7% a year ago. Reported operating margin of 9.1% declined 130 basis points due to higher distribution costs, the absence of depreciation and amortization charges in the prior year from Home and Personal Care and higher restructuring charges. On a reported basis, net loss and diluted loss per share were driven by the unrealized loss on our Energizer common stock, the absence of a large prior year income tax benefit and higher tax expense this year related to the recently issued regulations under the 2017 Tax Cut and Jobs Act, partially offset by lower interest expense. Adjusted diluted EPS of $1.35 increased 7.1% due to lower interest expense and shares outstanding compared to the prior year.
Turning to Slide 11, Q3 reported interest expense from continuing operations of $33,900,000 decreased $29,400,000 driven by lower debt levels. Cash taxes of $7,600,000 were comparable to last year. Depreciation, amortization and share based compensation from continuing operations of $49,800,000 increased from $33,600,000 last year, primarily due to higher share based compensation and the impact of the HPC depreciation and amortization this year as a result of moving the unit back into continuing operations. Cash payments for transaction and restructuring and related charges for Q3, including discontinued operations were $14,600,000 and $11,800,000 respectively, versus 27,500,000.0 and $23,100,000 respectively last year. The lower cash spend was driven primarily by HHI DC consolidation and divestiture activity in the prior year.
Now to business unit results beginning with Slide 12 in Hardware and Home Improvement. HHI's 4.8% reported net sales decline reflected lower U. S. Residential security and builders' hardware net sales, which were negatively impacted by $20,000,000 of higher Kansas backlog shipments in the prior year, while Plumbing grew modestly. Organic net sales declined 4.3%, excluding unfavorable FX of $1,800,000 And I'll also do the math for you on the $20,000,000 impact year over year on Kansas.
That would have if you strip out the impact of that, it would have resulted in about 1.1% organic growth. Adjusted EBITDA declined 8.4% to $67,700,000 with 70 basis points of margin contraction to 19.1% from higher input costs, partially offset by positive pricing. Looking ahead, HHI sees continued growth in its electronic deadbolt and smart lock product lines, especially given relatively low and fast growing U. S. Residential adoption rates.
In Q4, we also plan to introduce new products, benefit from price increases and continue to invest behind cloud technology, mobile apps and access control. Now to Home and Personal Care or HPC, which is Slide 13. Reported net sales fell 4.3% negatively impacted by unfavorable FX of $10,300,000 Organic net sales were essentially flat. Net sales for small appliances decreased primarily from prior year loss distribution in The U. S.
Mass channel in coffee makers and toaster ovens, while personal care sales fell predominantly in The U. S. As a result of prior year hair care distribution losses in the mass channel. These were partially offset by growth in Europe, primarily from e commerce and UK food and drug channels as well as growth across Latin America. The decrease in adjusted EBITDA and margin were attributable to higher transaction foreign exchange and input costs, partially offset by productivity.
As we've said before, we are resetting HPC in fiscal twenty nineteen, rebalancing its cost structure and investing more behind its brands to prepare for growth in 2020. The newly installed leadership team will continue to focus on innovation across core product categories, coupled with financial recovery initiatives and organizational streamlining, business simplification and rationalization. Moving to Global Pet, which is Slide 14. Building on solid first half sales performance, reported net sales increased 13.9%. Excluding unfavorable FX of $3,500,000 organic net sales grew a very strong 15.7%.
Significantly higher net sales were attributable to continued strong growth in U. S. Companion animal, predominantly dog chews and treats, along with modest growth in U. S. Aquatics.
Net sales in Europe also grew, driven by favorable year ago comparisons from distribution center fulfillment constraints. Adjusted EBITDA increased 11.7% to 39,000,000 with a 30 basis point margin decline to 17.6% as a result of increased volumes in companion animal and positive pricing, partially offset by higher manufacturing and distribution costs. In Q4, we expect another solid performance in our large U. S. Region with new product launches supported by higher investments in data driven digital marketing aimed primarily at the rapidly growing e commerce channel.
Pet continues to work to lower its global manufacturing and supply chain cost base and trim selective unproductive SKUs to drive a higher long term margin structure. Turning to Home and Garden, which is Slide 15. The 2.6% net sales decrease was driven by unfavorable weather conditions during most of the quarter, with reduced sales in household insect and outdoor controls being partially offset by growth in repellents due to strong early season home center orders. Adjusted EBITDA decreased 6.5% to $53,300,000 and EBITDA margin declined 110 basis points to 26.3%, driven by input cost increases and higher marketing and advertising investments, partially offset by productivity and pricing actions. Despite the weather challenges in Q3, we continue to expect Home and Garden to grow both sales and adjusted EBITDA in 2019 behind distribution wins.
Moving to the balance sheet on Slide 16. We completed Q3 in a solid liquidity position, including $724,000,000 available on our 800,000,000 cash flow revolver and a cash balance of $161,000,000 Debt outstanding was $2,300,000,000 down 51% from $4,700,000,000 at the end of fiscal twenty eighteen. Capital expenditures were $13,200,000 in the quarter versus $18,500,000 last year. Turning to Slide 17 and our 2019 guidance. Spectrum Brands now expects reported net sales to be comparable with the prior year with foreign exchange having a negative impact of approximately 150 basis points based on current spot rates.
We are affirming our full year adjusted EBITDA guidance of $560,000,000 to $580,000,000 Depreciation and amortization is expected to be between $230,000,000 and $240,000,000 including stock based compensation of approximately $55,000,000 versus $12,000,000 last year, with roughly $14,000,000 of that expected in Q4. For adjusted EPS, the $29,000,000 of catch up depreciation and amortization in Q1 from HPC has been excluded. We are now increasing restructuring and restructuring related cash spending to be between 60,000,000 and $70,000,000 relating to Project Galileo and capital expenditures are now expected to be between 60,000,000 and $65,000,000 We have approximately $1,000,000,000 of usable federal NOLs remaining post the asset sales. This number has been updated to reflect the impact of the recently issued regulations under the 2017 Tax Act as previously mentioned. And finally for adjusted EPS, we use a tax rate of 25% including state taxes.
Thank you.
Speaker 1
And now back to Dave for Q and A. Thanks, David and Doug. With that operator, you may now begin the Q and A session please.
Speaker 0
Our first question comes from Olivia Tong of Bank of America. Your line is open.
Speaker 4
Great, thank you. First question I had was just about gross margin. I know it was up only 10 basis points but the stabilization was nice to see. But I'm a little surprised given the sales mix given that you have an overage in one of your lower margin businesses. So can you talk about the offsets, anything else that helped even if it was just one time ish?
Speaker 2
Yeah. I'll let Doug handle that. Yeah. Go ahead, Doug.
Speaker 3
Sure. Sure, Olivia. It's a I mean, it's a combination of things across all businesses. And I understand that, you know, the mix element you're pointing to, but we did have good pricing across the pet part of our business in the year and and some continued good productivity. So even outside of our outside of our our new productivity program, Galileo, that's a broader restructuring program.
But even outside of that, this business and our operators continue to drive good productivity. We also had pricing in HHI that was in place in the quarter. So I would say that pricing and productivity are the primary drivers.
Speaker 4
Got it. And then Dave, last quarter you sort of downplayed the potential for profit in EPS because your inclination would be to invest. So do you feel like you've got the right level of investment? Are there projects that potentially moved around? Or were the projects that you have in place just more successful than you had originally anticipated?
Speaker 2
Yes, look it's multifaceted. I think look we want to continue to invest. I really think we are probably one or two quarters away from trying to hit our rhythm, real rhythm and cadence to getting all the investments we need in terms of real R and D, NPD and marketing. What excites me is quite frankly this effort started two years ago in isolation in PET. And you can actually see you know, the I'm telling you, these quarterly numbers are a result of two years' worth of hard work where, you know, you really did get the right consumer insights.
We really spent the money to invest in R and D to create a new product pipeline portfolio that got the not only the customer but the end consumer really excited about the product. And then you put a little marketing on it to change the dynamic from just a push to a pull model and you can see the growth you can get out of it. Look, we put think Let me give you You asked a lot of questions, so let me hit it. On the Home and Garden side, we did invest heavily to get distribution. And so it's frustrating for me to have a call like this where our results aren't even better there because we did the right thing for the business.
We really did quite a good job. The team did an amazing job. It's just when you get an entire month where you're washed out and you got tornadoes, and I no. I used to be on the sell side. You kinda hate that as an excuse and and I do too, but it's just people aren't spraying their their lawns and they're not, fending off insects when it's when it's just soaking wet for a whole month.
So unfortunately that impacts the short term, but that does not dull our enthusiasm or excitement for that business. In fact we've just hired a new head of R and D in Home and Garden and we're building out an entire new R and D team there. And as part of 2020, we're going to put additional resources behind that. So again, look, on the appliance side, I'm thrilled. Mean, we just went last quarter was $2,700,000 EBITDA quarter.
We installed a completely new team there and to get that to $18,000,000 EBITDA this quarter was a very nice rebound. Still a lot of wood to chop there. In HHI, we have to continue to find the right price point to get our velocity back up just given the housing is a little slower than we originally planned at the beginning of the year. But no, think look, I think we're going to continue with what we're doing. I think we're just getting into the real throes of internally Doug just mentioned the word Galileo was the internal project code name, but this global productivity improvement program is really exciting.
Speaker 4
Great, that's helpful. And then just lastly on cash flow. I know cash generation is typically very second half weighted, but usually by now you're closer to running sort of flattish and you're not quite there yet year to date. So I know you reiterated the EBITDA guide, are you also expecting positive free cash flow for this year?
Speaker 3
We are. We are. And what's really the single biggest driver of the phasing of cash flow this year versus last year, Olivia, is the fact that we paid off so much debt earlier in the year that we've dialed back some of our factoring programs. And as you know, we go prepared to go back into the working capital build season in the next few months. So we'll turn those factoring programs back on.
Speaker 4
Great. Thank you.
Speaker 0
Our next question comes from Bob Labick of CJS Securities. Your line is open. Good morning.
Speaker 1
Good morning, How are you?
Speaker 5
Hi, great. I wanted to dig into the global productivity plan. You said $35,000,000 in savings, I think that's the from procurement. And just to be clear, most of that gets reinvested? Just that's the first question.
Most of that's going get reinvested into the P and L next year?
Speaker 2
Yeah, I'll you what, let me I'm going to give you a long winded answer. But I want to give you as much granularity as I can and we'll kinda get into this as as we develop. But look, we we've been thinking a lot about how much of this do we disclose and when do we disclose it. And, you know, we wanna, you know, we just we wanna disclose it as we as we as we get to it. And so this is really just phase one of it.
There's a lot more to come and the next couple quarters will be a lot more work to be done on the program and we don't want to get out ahead of our skis at all. And so look, we've spent a decent amount of money now executing the first wave and you're correct that initial 35 is strictly coming out of procurement side. There's more to come on the procurement side. In fact, me look, let me back up. This is really a very exciting time for Spectrum.
Want to thank all the associates that are listening on the call. I know a lot of employees call in. The team has really bought off on this what we call GPIP, Global Productivity Improvement Plan. And look, this last year, has a year stabilizing the business, investing behind it. We're doing the right things to bear we're treating the roots so we can bear fruit a year or two from now.
Look, we also significantly strengthened the cap structure, right? Our net debt reduction has been $2,400,000,000 in just the last couple of quarters with more to come. To Olivia's question on free cash flow, we will actually deliver the free cash flow that we told the Board we would a year ago. So we're on track there. But operations is really, really what I'm getting jazzed about.
And at times, look, all get caught up with short term numbers and quarterly results, including myself. But look, it's a very we're taking some very real positive actions today that will create really positive tangible results a year or two from now. And that's why I'm excited. I mean, we've made a lot of progress. It's way too early to declare victory.
We've got a lot more work to do. But if I could summarize it for you, again, 2019, the whole goal is projected to be a year of stabilization, assessing and repositioning the company for growth, right? And despite these substantial tariff headwinds, challenging Home and Personal Care category, the company is on its plan through Q3 and it's expected to deliver the year. So check one. Operational improvements continue to stabilize financial performance.
Check two, customer service materially improved across the board year over year. Check three, okay? When I look at okay, now where do we go? Structural changes are enabling progress. Each business unit has been established as an independent global entity.
That's completely new in the last twelve months. The senior regional matrix structure has been eliminated and operations have been streamlined, period. We have strengthened this organization. We've refreshed managements. We've replaced management teams.
We have upgraded talents throughout this company in very key positions, okay? So that's my point to and I promise you I'd be long winded. But the biggest point, we are improving culture, we're increasing accountability and the teamwork is here. Business units are sharing best practices, they're collaborating at a high level despite the separations recently of Home and Garden and Pet, but you can see that separation's actually bearing fruit. We have a quick candid acknowledgement of issues and actions that are addressed fast today.
That was not the culture when I took the expanded role. And we've got an open productive discourse around strategy risk and problem resolution. So we've enhanced operations, organization and culture and we have really positioned Spectrum to return to earnings growth. On the global productivity improvement plan, look, it's going to touch a lot of areas. So right now we're in wave one, That's strategic sourcing.
Okay? There's another wave to that. And then we go into commercial. And commercial has to deal with our go to market strategies. Okay?
Then there's a g and a part of this. Yes, there is. And there's an IT enablement. There's a lot of things here that if we invest in IT, can automate, we can get better data management, and quite frankly we can do things a lot faster, a lot quicker, much more efficiently. There's a supply chain organization component to this.
So it's multifaceted. It's a multi year program. We're just giving you what we progress today. We're updating you with that today in today's press release. The payback is generally a year to eighteen months on these things and there's a lot more to come.
Does that help you?
Speaker 5
Yes, was terrific and tons of detail and much appreciated. You touched on, so I'll just I'll do one other quick question and then jump out. But just obviously, you've maintained guidance this year and done really well in the face of tariffs. Can you just give us an update on the expected impacts from the May increase in tariffs and then the proposed new 10% on the next $300,000,000,000 I guess List three and List four tariffs, expected impact going forward, probably minimal for this fiscal year, but how do you think about it annually or next year?
Speaker 2
Yes, I'm going let Doug take the number side of it. But again, I just want to give a shout out to the team. I mean tariffs, it's no joke. It's a lot of work. The numbers are material.
And it's easy to say, Oh, take price. Those are difficult discussions. Demand is not inelastic everywhere you go. And you've got hard conversations with your suppliers and you've got to get more efficient yourself. And so there's just a lot of work going on the surface here to offset that.
So I appreciate your comments as you led into the question. But I am really grateful to all the team members of this company for pulling together and for helping us get the offsets necessary. But Doug, why don't you take the nitty gritty?
Speaker 3
Yes, sure. So by round numbers, impact of all the tariffs that are implemented to date. So I'm excluding the most recent week because there's just not clarity yet on what that's going to impact and what the timing will actually be. We think we know what the timing is. We don't know what the scope of it is.
I'm going talk to what's out there. And what's out there impacted will impact 2019 by about $70,000,000 And then the fully annualized amount of that, which will be realized in 2020 on a run rate basis is $120,000,000 So another $50,000,000 step up going into next year. And that to date has been and you see this in our gross margin, it's been largely offset by a combination of pricing and productivity. And our plan is to continue to manage those two levers as we go forward. But as David said, pricing is are not easy discussions.
They're challenging discussions with retailers, but we have been with our customers for several months and everybody understands the landscape. So we'll continue to do that and continue to press hard on productivity elements.
Speaker 2
Net net tariffs are tough, we're tougher, we'll manage them.
Speaker 5
Terrific. All right, thank you very much.
Speaker 3
Thank you.
Speaker 0
Our next question comes from Faiza Alwy of Deutsche Bank. Your line is open.
Speaker 6
Hi, thanks. Good morning.
Speaker 5
Good morning.
Speaker 6
So I guess just to follow-up on the tariff question. Know Dave you mentioned sort of varying elasticities across categories. So it seems like you've taken some pricing so far. Can you share sort of what you've learned so so far? And, you know, which categories have you found to be more elastic than others?
Speaker 2
You know, I really don't wanna go into that, and I'll be honest for competitive reasons. You know, I'll just listen. It's it's intuitive. Right? Obviously, we have the strongest brands, and you have dominant market share positions.
You you tend to have more pricing power. But, honestly, listen. We've taken price across the entire business line. We we, you know, we we can do that. But, yeah, there are I mean, there have been instances where we've taken price, and you can see the elasticity.
And, you know, it's we are vertically integrated manufacturer, and and so sometimes you just have to re reassess. You know? And that's listen. That's what's so fantastic about this global productivity improvement plan is, you know, we're gonna free up resources by running the company a lot more efficiency, free up cash, a lot of cash, And we can now invest that into r and d, NPD, advertising, marketing, etcetera. We can also potentially invest that in margin, right, assuming we get that luxury over the next couple quarters, and then we can ramp up volume again.
And so that's why I said in some of my earlier remarks, you know, we you know, that's why I'm excited. It's it's been a it's been a it's been a look. The team, it's been it's been a it's been a lot of hard work this year stabilizing platforms, but everybody's bought into this. You know, there is no you know, we're we're going forward with this program. We're at the tip of the iceberg, and, you know, there's there's just a lot to be had.
And I think it's going to meaningfully improve our ability to navigate the competitive tariff waters we find ourselves in today. I really don't want to add more color than that.
Speaker 6
Okay, understood. Can you talk a little bit more about I know you've mentioned sort of productivity and like sourcing benefits, things like that. Are you doing anything from sort of reducing the tariff exposure from that perspective? Like are there changes that you've made in terms of sourcing whether it's moving out of China or moving into other countries or moving to The U. S?
Speaker 2
I mean look there are some small supply chains that we are doing, but there's nothing of the magnitude you read about in the press. You know, picking up a supply chain and moving it, is is a big decision. And, you know, as as a financial allocator of capital, you would you would need to know that this is gonna be the tariff landscape for the next sixty months. Otherwise, you could make a decision that might look good on paper today, but if something changed in a year, would be a, you know, be a very negative return, you know, capital return on capital. So you got to be careful to not have a knee jerk reaction, but you also need to protect your company in the short term.
And so I would say, look, we've done a little bit around the margin and we're always looking for ways to hedge exposure, but nothing dramatic. Doug, do wanna No. I agree with that. Yep. Go on.
Speaker 6
Okay. Just last question for me. Dave, seems like you seems like you think that there are a lot of investments that you would like to make in the business sort of above and beyond than what you've made this year. So in that context, can you share with us how you're thinking I know it's early, but how you're thinking about 2020? And what level of investments do you think are required in the near term to get the businesses to continue to grow or grow at the pace that you would like them to grow?
Speaker 2
Yeah. I'd like to kick the can on that and talk about that kind of. We have our AOP plans, you know, in October. I'd really like to talk more about that, you know, as we get into next year. But I mean, if you're asking me, you know, can we make these investments and still grow the top line and grow the bottom line in 2020?
I'm gonna tell you, yes. So but I you know, I'm I'm not gonna go into, hey. I need another 5,000,000 r and d in this division by this time. I I just you know, there's yes, sorry.
Speaker 6
Okay, I get it. Thank you.
Speaker 0
Our next question comes from Sam Reid of Wells Fargo. Your line is open.
Speaker 7
Awesome. Thanks for taking my call. I wanted to dig a little deeper on your growth in the global Pet segment. Obviously, results here were pretty good and I think maybe a little bit better than a lot of people were anticipating on the organic line at least. So could you give us a sense as to sort of how much of that reflects maybe the underlying strength of the business versus anything that might be more one off like better than expected shelf space gains or maybe catch up from some of the headwinds you guys faced last year?
Thanks.
Speaker 3
Yes, Sam. The significant year over year comp issue and it is significant, it's about a $6,000,000 impact from last year when we were starting up a European DC and some orders moved from Q3 to Q4. Other than that, we're seeing underlying strength in our companion animal business, our treats business in particular in The U. S. Market has been strong.
European market overall continues to perform nicely for us this year. And even US aquatics grew a little bit this year, and that's the one that we have the most difficulty pegging from a year to year basis. It's never going to move in a huge way one way or the other, but this year it's broken a little bit favorably for us.
Speaker 2
Look. I I let me listen. Let me give you the bigger picture. You know? This was this was for me, this was ten years of doing acquisitions.
And as long as I did an acquisition, you know, we just everything kept growing great. And what's going on right now is in my new role is we're actually fundamentally investing behind organizations organically to grow. And, you know, that's what I thought was getting done, but wasn't getting done. And so, you know, after 18, that's the reset of 19 is to actually put seed in the ground through r and d, through new product development and marketing, and drive the businesses organically so they don't need acquisitions. And, you know, it's ironic that I'm the one saying that and leading the program, I'll tell you that.
But I I, you know, I I am telling you that the pet business is a shining example of when you actually do the hard work and you bite the bullet and you invest in r and d, you have true new products to excite the to basically excite the retailer, but get the consumer to be excited about pulling it away off the shelf and get the velocity of the point of sale, and then you've got something to write home about. And I you know, this is no one trick pony. You know, I think the I think the pet business in the early innings of a real bull run, and it's fundamental work. And that's, again, that's why I'm really jazzed about, look, you know, get through the December and March quarters that we have coming up, we're taking real actions to make sure that that's gonna happen in the remaining three units.
Speaker 7
Got you. No, that's super helpful. I appreciate the color there. I wanted to maybe switch gears a little bit and touch on HHI just for a second. It looks like the growth there actually still accelerated on a two year basis even after stripping out some of that backlog last year.
I wanted to know if there's if that's a reflection of the underlying category growth. I know you mentioned a little earlier on the call that you were still seeing some weakness there at least in the new home market or whether that's also just a reflection of some of your pricing actions? Thanks.
Speaker 2
You're one of the first to notice that. I thought most people would take a much more negative view there, but you're not wrong. If you actually strip the noise out, you're right. I'm still cautious. Everybody's mad at me because I think I was a little negative on housing on the first quarter call going back, I guess it was two, three quarters now.
But look, again, I'm not an economist. I will tell you this. I think we've got the right brands. We actually have a pretty healthy NPD pipeline. We're launching new products.
I think that's the one area where we actually can do a few things on some levers that we control ourselves to stimulate more velocity at POS, point of sale. And so, look, I, you know, I also will tell you this. If you look at housing starts, I mean, they really haven't gone up. They've been on their back ever since kind of the o nine, you know, the o eight, o nine, the great recession. I mean, this country hasn't produced a million new home starts in god knows how long.
And so you're still in the $606.50, 700 ish range. But, you know, the backdrop, if you really look at it, is not that bad. You you know, interest rates are on the floor. Everybody seems to have you know, wants a job, has a job. I think the big two restraints that are macro here are, you know, student loan debt.
And but, you know, millennials grow up and they want kids. Multifamily continued to be a strong point and that's where I think we have a lever with our Smart Key technology. I was in a hardware store the other day and a guy told me that Smart Key related to one of our Kivo or one of our Aura products. And I was like, no. It's it's the ability to change your lock in ninety seconds or sixty seconds or less that I'm gonna call a locksmith.
So we've had this great IP, this patented technology, and it's was talking to a home actually I talked to a multi family guy the other day and and the business unit's actually bidding the guy now on a on a on a deal. But this guy owns billions of dollars of apartments around the country, and I was telling him about Smart Key and he didn't know about it. I said, my god, you know how much ease and money you could save yourself if you used our Smart Key technology? So again, I think there's a lot more we can do there, but I actually don't think the backdrop is as bad. I think, I've talked to some people that think we could have a super cycle almost where, yeah, it's slow growth, but it goes for a really long time given the rate and the income backdrop.
But trying to be specific to your question, I think there's a couple levers we can pull get growth going better at HHI.
Speaker 7
Awesome. No, that is incredibly helpful. Thanks so much guys.
Speaker 3
Thank you.
Speaker 0
Our next question comes from Ian Zaffino of Oppenheimer. Your line is open.
Speaker 8
Hey, good morning guys. This is Mark on for Ian. Thanks for taking our questions.
Speaker 7
Hi, Mark.
Speaker 8
Hey, how are you guys? Just quickly, can you guys touch upon the growth of e commerce? It seems like it continues to grow in Europe. I guess like how big is e commerce now as a portion of HPC? And where would you guys like to see that grow to?
Thanks.
Speaker 2
Yes, look, thanks for asking the question. E comm is a really big bright spot at Spectrum Brands. E comm grew I think 20% this quarter. Doug, somebody correct me if I'm wrong.
Speaker 3
A little over 20%, That's right.
Speaker 2
So north of 20% growth, and that's the corporation. Know, I mean, you know, e comm used to be zero. I think we're over $400,000,000. I, you know, I'd like to get that number bigger, faster. But, you know and and we've listen again with it's it's it's part and parcel with the whole global productivity improvement program.
And we're we're deliberately hiring, you know, digital experts, guys that actually understand, I don't, how to write and read algorithms and how to get the product viewed and placed at the right point, how bid ads. So it's a great opportunity for us. It clearly is a bright spot, and we've got a lot more room to run. I don't know if Doug and anyone Yeah.
Speaker 8
Mark, the only Mark,
Speaker 3
the only thing I'd like to add to that just for clarity is is we measure ecommerce, or we're talking to you about ecommerce in in The US and in Europe. We have obviously e commerce platforms in Latin America and Asia Pacific too. It's just more difficult for us to separate what's going to brick and mortar from pure play or from ecom. But we obviously we grew a little faster in Europe from a rate perspective than we did in The U. S, but both very healthy.
Speaker 8
Okay, terrific. Thank you guys very much. You bet.
Speaker 0
Our next question comes from Karru Martinson of Jefferies. Your line is open.
Speaker 9
Good morning. It's been a while since we haven't heard you talking about M and A and talking about reinvesting in the business like you said. Does that change the rating agencies' perspective of you? And does that change the way the equity market looks at you?
Speaker 2
Man, Karru, please, can you make phone calls to two places for me? I would yeah. I thought I I know. I did all the deals for ten years and now I'm fixing the ops. But no.
Look. You're not wrong. Right? I mean, our we you know, look. I think we're trying to be conservative saying we'll be three and a half times levered or less closing this year out.
You know, and our free cash flow is gonna materially improve as we go into 2020. And, yeah, I thought less levered credits should trade at higher multiples in terms of the equity value. So I appreciate your comments. I don't know how to execute them. I'm doing everything I can on my side.
Speaker 9
Okay. And then in terms of that stub piece, the six and five eighths of the 20, what are your thoughts on the capital structure that this company should have for the long term?
Speaker 2
Yeah. Listen, I'd like to get those out of there yesterday. If we didn't have another tariff tweet, it'd probably go sooner rather than later. Clearly, the 10 treasury down at 1.6% doesn't hurt, but equity volatility doesn't help. And again, it's just another lever we can pull to lower our lower our interest expense and, you know, pay down our debt and generate more free cash.
So, yeah, you're not wrong. That's another low hanging fruit. We see it and at the appropriate time we'll go get it.
Speaker 9
Thank you very much guys. Appreciate it.
Speaker 2
Thank you, sir. Thank you.
Speaker 1
Hey, operator, looks like we have time for one more question and one question left, please.
Speaker 0
Our next question comes from Carla Casella of JPMorgan. Your line is open.
Speaker 10
Hi. Most of my questions have been answered but just one thing on the tariffs. Can you just say how much of your product was covered by the first three lists of tariffs versus the List four? Know you couldn't quantify any impact from List four but how much of your products were covered under that List four?
Speaker 3
We'll have to get back to you on that one. I don't have that in front of me or even we'll have to actually slice the data a little different way to get that because it looks at the entirety of the supply chain. But so far, HPC, the appliance business has actually been impacted less than some of our other business. HHI has been impacted in a meaningful way, pet in a meaningful way and then Home and Garden much lesser as well. But Dave or Kevin will follow-up with you, Carla, on the details.
Speaker 10
Okay. Thank you.
Speaker 1
Thank you. Okay. With that, we've exhausted our questions and are pretty much close to the top of the hour. So we will conclude our conference call at this stage. Certainly want to thank David and Doug.
And on behalf of all of us here at Spectrum Brands, we'd like to thank you for participating in our fiscal twenty nineteen third quarter earnings call. Have a good day. Thank you.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.