Spectrum Brands - Earnings Call - Q3 2020
July 31, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Q3 twenty twenty Spectrum Brands Holdings, Inc. Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to turn the conference over to your speaker today, Kevin Kim, DVP of Investor Relations. Thank you. Please go ahead.
Speaker 1
Great. Thank you, Angie. Welcome to Spectrum Brands Holdings Q3 twenty twenty Earnings Conference Call and Webcast. I'm Kevin Kim, DVP of Investor Relations and moderator for today's call. 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 www.spectrumbrands.com.
This document will remain there following our call. Starting with Slide two of the presentation, our call will be led by David Mora, Chairman and Chief Executive Officer Jeremy Smelter, Chief Financial Officer and Randy Lewis, 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 today, 07/31/2020, and our most recent SEC filings and Spectrum Brands Holdings' most recent annual report on Form 10 ks and quarterly report on Form 10 Q. We assume no obligation to update any forward looking statements. Also, please 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.
Speaker 2
Hey, thank you, Kevin. Good morning, everybody. Thanks for joining us today for our third quarter call. Before we turn our attention to the company's third quarter results, I want to say again thank you to all of our employees. We've got 11,000 plus employees around the world.
And to all of our frontline workers in our factories and distribution centers, I'd like to say thank you. You guys are the true heroes of our company. Your sacrifices are allowing Spectrum Brands to embrace our new identity as a true home essentials company. Because of you, are innovating, marketing, and we're bringing joy and happiness to our consumers worldwide. Whether it's in the kitchen, the yard, around the house or with your pets, we are delighted to make life better and more enjoyable for our consumers of our products and services throughout the planet.
Turning to slide six, our results this quarter reflected strong demand that accelerated throughout the course of the quarter. Simply put, we have embraced our position as a home essentials business and instead of pulling back in the face of the COVID-nineteen challenges, we are continuing our drive to add talent, create new innovative products and improve our operating model. In addition, just in the last sixty days and ramping up in the current quarter, we have committed to significant increases in our advertising investments to meaningfully accelerate the long term organic growth of our company. The actions of our Spectrum Brands family reflect resilience and operational excellence in this ever evolving environment. This includes adopting safety protocols in response to COVID-nineteen, navigating temporary government mandated factory closures that have impacted hardware our hardware home improvement businesses and balancing strong underlying demand including large mix shifts.
The temporary COVID-nineteen related supply disruptions from our HHI division negatively impacted results this quarter, but we believe the situation is largely resolved and supply is expected to be caught up by our first fiscal quarter. Furthermore, our global productivity improvement plan savings positively impacted each of our four businesses in the third quarter. As we indicated earlier in the year, these savings are now beginning to outweigh the headwinds from the annualization of tariffs, which we expect to be an incremental $70,000,000 in this fiscal year. We continue to expect GPIP to generate at least $100,000,000 of full run rate cost savings over the next nine to twelve months. To be frank, I continue to be very excited about our global productivity improvement programs.
The impact of this critical strategic initiative is evidenced more and more every day with our employees and increasingly more with our customers and investors. The savings across procurement initiatives and operating model improvements are driving real benefits, aiding our commitment to deliver sustainable organic growth by balancing these savings with reinvestments and allowing us to plant the necessary seeds back into our businesses to grow our biggest, most promising brands. And in fact, we are doing just that. As a home essential company, our products evolve, revolve and center around the home. Aided by our commercial operations team or what we call com ops, we've quickly pivoted to ensure our new products and incremental advertising investments resonate with consumers finding themselves spending more time at the home.
Since the initial change in consumer behavior back in March, our comm ops and business units work together as one to recognize, adapt and lean into the spike in at home trends that is positively impacting every one of our businesses. We believe this trend is a sustainable tailwind to drive growth and repeat purchases as consumers spend more time on the home front. Starting in our Home and Garden division, along with our Home and Personal Care unit, and expanding during the July 4 holiday across all the other business units, we have approved about $20,000,000 of incremental advertising spend that will continue into the 2021. We expect these investments to drive returns from the George Foreman smokeless grill to the Spectracide U Haul just to point out a couple. Again, instead of pulling back, the company is leaning in.
We are investing and we are expanding. From a balance sheet perspective, we continue to be focused on liquidity and a strong balance sheet. On June 30, we strategically refinanced our existing $890,000,000 cash flow revolver and we replaced it with a new five year $600,000,000 cash flow revolver and a $300,000,000 ten year senior unsecured notes, which are due in 02/1930. This leverage neutral transaction allowed us to maintain a very strong liquidity position while extending the maturity profile of our debt and locking in favorable pricing. Also during the quarter, we did opportunistically sell 1,100,000.0 shares of our Energizer common stock holdings for proceeds of about $50,000,000 and we ended the quarter with a 3,100,000.0 share position in Energizer.
If I could have you turn to Slide seven now please. Third quarter results represent that three of our four business units during the third quarter actually generated healthy organic growth and despite COVID-nineteen related challenges, our global team generated financial performance that was consistent with the prior year. Importantly, our e commerce business continued to generate exceptional growth across all the businesses with sales up 44% compared to the prior year and now representing approximately 16% of our base business. Total demand remains strong with July net sales up across all business units. Our future is bright.
As a home essentials company, we believe we remain well positioned financially and operationally to drive long term sustainable organic growth. Turning to Slide eight, I'd like to take just a few moments to look back just over the past ninety days to some comments from our last earnings call. If you remember, I concluded my second quarter prepared remarks indicating our plans to realign our supply chain to better reflect and accommodate new demand patterns, plans to continue to execute on our global productivity improvement programs and to embrace a more consumer driven mindset. We delivered on those expectations in the third quarter by achieving better than expected results in the midst of a very challenging environment. Taking another step back, in the face of incremental tariffs and COVID-nineteen challenges, so far this year, we have grown organic sales and adjusted EBITDA despite significant supply chain issues.
While our teams are focused on finishing the year strong, our recent results demonstrate our resilience as a leading consumer staples company. We believe our laser focus on operational excellence, driving efficiencies through our global productivity improvement plans and investing back in the business to drive long term sustainable organic growth continues to point the way to a very bright future. If I could have you turn to slide nine in the presentation. Our employees are the absolute heroes of this story. They continue to demonstrate servant leadership across the businesses, and this includes our work to launch timely new products.
The team has innovated by introducing Cutter hand sanitizer and more recently Nature's Miracle Disinfectant. Our plants in Blacksburg, Virginia, Melee, Germany continue to designate part of their facilities to produce hand sanitizer and help combat the spread of COVID-nineteen. Given the continued needs, we continue to donate these products and so far we've donated to many organizations, some of which include the St. Louis Area Food Bank, the Northwest Arkansas Food Bank, and New York City Relief, as well as many, many organizations around the country and the world. These products are also available now for purchase on several e commerce sites.
Turning our attention now to slide 10, just as a reminder, our Spectrum twenty twenty guiding principles remain vision, clarity and focus as we create the faster, smarter, stronger Spectrum Brands of the future. Our vision is being a strong innovator of great products, supported by consumer insights and marketed with excellence. We are bringing clarity to our organization by continuing to simplify our business, streamlining our go to market strategies and becoming a much more productive and efficient company. Our unwavering focus on best in class
Speaker 3
customer service,
Speaker 2
this is our pathway to consumer driven mindsets across the businesses and we accept nothing but outstanding quality and service while increasing innovation and marketing investments to drive our brands and the long term growth of our businesses. I continue to believe the best days are ahead of this company as we work to deliver significant long term value creation to our shareholders and produce sustainable growth going forward. Now you'll hear much more from Jeremy on the financials and Randy will walk you through the additional business units insights. I'll now turn the call over to Jeremy.
Speaker 4
Thanks, David. Good morning, everyone. Turning to Slide 12 and a review of Q3 results from continuing operations, beginning with net sales. Net sales decreased 3.7%. Excluding the impact of $11,000,000 of unfavorable foreign exchange and acquisition sales of about $3,000,000 organic net sales decreased 2.9% with growth in Global Pet Care, Home and Personal Care and Home and Garden offset by a decline in Hardware and Home Improvement due to the supply challenges.
Gross profit decreased $12,000,000 and gross margin of 35.4% increased 10 basis points despite supply restrictions due to favorable product mix and improved productivity. SG and A expense of $225,000,000 decreased 3.4% at 22.8% of net sales consistent with last year driven by lower operating expenses and restructuring costs. Operating income growth of 1.9% was driven by lower restructuring activity, partially offset by the supply disruptions in hardware and home improvement. Net income and diluted earnings per share were driven by gains on the company's Energizer common stock holding, gain from the extinguishment of sale of CLO debt and lower shares outstanding. Adjusted diluted EPS increased 0.7% as favorable product mix, improved productivity and lower shares outstanding were partially offset by supply disruptions from HHI.
Adjusted EBITDA decreased 4.9% and adjusted EBITDA margin decreased 20 basis points. The decline in HHI was partially offset by growth from Global Pet Care, Home and Personal Care and Home and Garden. In total, we estimate that the overall impact of COVID-nineteen to our ability to supply product in the quarter reduced net sales and adjusted EBITDA by over $100,000,000 and Turning now to Slide 13, Q3 interest expense from continuing operations of $36,000,000 increased $2,200,000 driven by higher debt from the revolver borrowings. Cash taxes during the quarter of $3,900,000 were $3,700,000 lower than last year.
Depreciation and amortization from continuing operations of $35,000,000 was $1,000,000 lower than the prior year. And separately, share and incentive based compensation decreased from 15,600,000 last year to $14,200,000 this year. Cash payments for transactions were $7,200,000 down from $11,800,000 last year and restructuring and related payments for Q3 were $25,200,000 versus $14,600,000 last year. The higher cash spend was driven by GPIP. GPIP.
Moving to the balance sheet, we completed the quarter by building meaningful financial flexibility with a strong balance sheet, including sequentially improving our liquidity position and maintaining ample flexibility on debt covenants. We had over 800,000,000 of total liquidity, including a cash balance of $466,000,000 and $341,000,000 available on our cash flow revolver. Total debt outstanding was $2,700,000,000 and up as a result of drawing down on our revolver. As compared to the prior year, third quarter ending inventory was lower by $151,000,000 as enhanced demand and supply delays associated with COVID-nineteen combined with the increased discipline and improved process around inventory management we demonstrated in the past three quarters limited our inventory investment. We continue to invest in capacity, automation, and consumer insights to better manage our working capital and are really pleased with the progress this year.
On June 30, we successfully refinanced our $890,000,000 cash flow revolver with a new five year $600,000,000 cash flow revolver and $300,000,000 of five and a half percent senior unsecured Consistent with our comments last quarter, based on the seasonality of our working capital, we generated substantial positive cash flow in the third quarter and we continue to expect substantial positive cash flow in Q4. Additionally, we sold approximately 1,000,000 shares of Energizer stock for proceeds of $50,000,000 during the quarter and held just under 3,100,000.0 shares at quarter end. Capital expenditures were $12,800,000 in the quarter versus $13,200,000 last year. Turning now to Slide 14 and our plans moving forward, while we have withdrawn our fiscal twenty twenty guidance, we did want to spend time discussing our current market conditions.
We believe our strong liquidity, which was further solidified in June, positions us to weather the storm of the pandemic. Regarding our capital strategy, we continue to target net leverage of 3.5 to four times. We improved this metric sequentially as we ended Q3 with net leverage of just below four times and expect to end the fiscal year at the midpoint of our target range. Additionally, we continue to temporarily suspend our share repurchase program. As mentioned earlier, we are also planning for incremental advertising investments in Q4 and beyond and Randy plans to provide more details by business unit.
And lastly, demand in July remains strong with net sales up across all business units. Now to Randy for a more detailed look at our operations.
Speaker 5
Thanks, Jeremy, and good morning. Thank you all for joining us today. My comments will focus on our operational performance in Q3, progress on our global productivity improvement plan and a review of each business unit to provide you with more detail on underlying performance drivers. In Q3, we continued to face COVID-nineteen related challenges, namely supply disruptions that threatened our ability to meet the increased demand from our customers for our home essential products. I will detail these by business unit in a minute.
But first, the safety of our teams has been our paramount concern for this quarter as we responded to the COVID-nineteen impacts on our supply chains globally. Though the challenges were varied throughout the different regions of the world, we have greatly benefited from a global governance approach of our COVID-nineteen response team that's ensured solid implementation and adoption of strict safety standards to protect our people and minimize the chance of COVID-nineteen spread within our facilities, while ensuring that we abide by all government mandates. These are similar challenges to what we faced in Q2. However, the operating environment improved across each of the business units throughout the quarter. Production rates have improved sequentially over the past few months.
And today, all of our manufacturing and distribution facilities worldwide are open and operating at or above the output levels from before the pandemic, and we are working diligently to replenish inventories and safety stocks. This is really critical because we have a very strong order book in each of our businesses. Let's dive into the Q3 supply chain performance of each business unit and kind of and cover the expectations moving forward. In HHI, recall that starting at the March, government shutdowns and reduced capacity mandates related to COVID-nineteen impacted two of our plants in Mexico and one in The Philippines. These government mandates continued into late May and limited our production capabilities, and as a result, clearly impacted our security category sales in Q3.
In response to these disruptions, our team successfully ramped up production at third party partners and moved work to other internal manufacturing locations where possible. However, these efforts were not quite enough to offset the impact of the temporary shutdowns. The good news is that after receiving the green light to reopen each of our facilities from these governments, our teams have now increased capacity back to pre COVID-nineteen levels or above. And we continue to push for further increases in capacity in these plants and are using alternative locations to help accelerate our recovery. As you may recall, earlier this year in Q2, we had a few cases of COVID-nineteen among employees at our Home And Garden facility in St.
Louis, and we took swift action to mitigate the potential spread. After temporarily shutting down and cleaning the facility and reviewing safety measures, we reopened successfully. Since then, we have redesigned production processes to adopt to new staffing conditions that enhance worker safety. The facility has fully recovered to pre COVID-nineteen output rates and is running hard to address consumer demand and retail orders reflecting strong POS levels and an extended selling season. For Home and Personal Care, after a slow sales start in April, we rebounded with very strong stronger than expected demand starting midway through the quarter.
This positively impacted sales and lowered our supply levels, which were already strained from the shutdown of Chinese suppliers in Q2. We expect inventories of our finished goods to return to more normal levels across most all categories by the end of Q4. Turning to Slide 17. As you heard in my supply chain review, we continue to benefit from stronger consumer demand for our home essential products. As a company, we believe we are gaining share across most of our major categories.
As David highlighted earlier, our commercial teams continue to adapt to the shifting consumer environment by prioritizing our marketing efforts to our best performing brands and well stocked products, tying the benefits to home life and enabling consumers to purchase them online. As a result, demand and top line accelerated across each business unit with all but HHI generating solid organic growth. Demand remains strong so far also in Q4. And while we still have two months to go, we expect strong orders as our recovering supply chains replenish low inventories at many of our retail partners. Additionally, our digital teams continue to leverage current data to identify consumer trends for new product and sales opportunities and create promotional content that appeals to these consumers.
This quarter, e commerce grew by more than 44%, a further acceleration from the 38% reported in Q2. E commerce this quarter represented more than 16% of our total net sales as a company. Now let's turn to our internal growth and efficiency efforts on Slide 18, where I can provide an update on our global productivity improvement plan. As a reminder, the most important aspect of this program is to drive sustainable growth in our products and brands through new capabilities and increased investments in consumer insights, R and
Speaker 4
D and
Speaker 5
marketing. To drive that investment, we are changing to operate more efficiently and capture cost savings by harnessing our collective knowledge, power and resources in key areas that are shown here. This program continues to be our most important strategic initiative to transform into the new Spectrum Brands. And the COVID-nineteen challenge has accelerated our progress, especially in our company culture. Our teams laid the foundation over the past year for partnership and collaboration across the enterprise, but the COVID-nineteen pandemic required us to work those partnerships more quickly and effectively across business units, regions and functions.
This cultural acceleration will facilitate the delivery of long term sustainable organic growth as we continue to focus more globally aligned strategies making. As David mentioned earlier, savings from our G TIP program positively impacted each business unit during the quarter, and we continue to expect the gross savings to be at least $100,000,000 annually and that these savings will be at full run rate within the next nine to twelve months. Much of this savings continues to be invested back into growth initiatives and consumer insights, R and D and marketing across each of the businesses. Now let's turn to a more detail on performance of each of the four business units. Starting with HHI on Slide 19.
Third quarter reported net sales decreased 20.6 and organic net sales decreased 20.4%. Adjusted EBITDA decreased 35.6%, primarily driven by negative volumes and incremental costs related to COVID-nineteen operating conditions. Customer demand in each of the three categories remained strong, and we expect a significant improvement in shipments given our order position and improving factory outputs as we progress through Q4. As we highlighted on the Q2 call, April demand reflected certain areas of slowing, particularly new home construction. But since then, the macroeconomic environment improved in May and June, and we expect this sequential improvement to continue into the end of the year, albeit still down a bit from prior year.
Additionally, we expect the repair and remodel market to benefit from consumers continuing to focus on DIY projects. Looking ahead into Q4, we expect net sales to primarily benefit from the reduction of high open orders as we work to resolve the supply chain constraints from the third quarter related to the temporary government order shutdowns. We also expect demand in Q4 and beyond to benefit from our new product introductions and incremental advertising investments. This includes the exciting retail launch of Halo Touch, our innovative biometric Wi Fi enabled smart lock. It was awarded best of CES in January.
And in addition to the smart key technology and voice assistance capability, Halo Touch not only offers homeowners and their families how to safely lock and unlock their doors from any remote location with an internet connection, but it also offers the enhanced at door experience of the innovative fingerprint access technology, conveniently allowing enrollment of up to 50 users which can be securely managed from the Kwikset app. Additionally, we've already invested incremental advertising dollars for the Kwikset and Pfister brands. In the case of Kwikset, new TV commercials, which we haven't seen in over ten years, began running around the July 4 holiday with a focus on our Microban products, which incorporates antimicrobial technology into the coating that lasts the lifetime of the lock and results in a bacteria reduction of over 99.9% versus an untreated lock. These incremental advertising investments are planned to continue into 2021 and initial indications are encouraging with tens of millions of early impressions to improve consumer awareness of this capability. Now to Home and Personal Care, which is Slide 20.
Reported inorganic net sales increased 36.5%, respectively. Adjusted EBITDA improved 37.4% to $25,000,000 Net sales were driven by strong growth in small appliances, partially offset by a moderate decline in personal care connected with COVID-nineteen related inventory constraints. North American sales in particular grew 14% in small appliances driven by mass online and discount channels. EBITDA growth was driven by higher volumes, mix favorability, productivity improvements, partially offset by foreign exchange headwinds. Strong growth in The U.
S, Canada and Asia Pacific and continued growth in Europe reflect the broad based turnaround momentum of our Home and Personal Care business behind the new management team, globally aligned strategies and increased investments. This quarter represented the fourth consecutive quarter of year on year top line growth and third consecutive quarter of year over year bottom line growth. Team's targeted approach for both home appliances and personal care are driving market share gains and helping consumers with at home meal prep and personal grooming needs in today's COVID-nineteen environment. Our team sees growth opportunities across cooking, food preparation, breakfast preparation, as well as growth from Shave and Groom in Q3. And this momentum continues so far in Q4.
Incremental advertising investment in Q3 was focused on promoting the new George Foreman smokeless contact grill, which has already launched at Walmart, which enables convenient and healthier meal preparation without the mess and smoke from stovetop cooking. Early indications are promising and in Q4, we plan to extend these investments for our George Foreman smokeless grill series, which will expand distribution both additional models and channels. We also plan to invest behind some exciting innovations in our Remington brand. In Europe and Asia Pacific, we will be promoting our new Hydralux series, which allows consumers to achieve expert results without any heat damage. And in The Americas, we will focus on our new Wet to Style launch, which allows consumers to save time by effectively drying and styling their hair in a single step.
Our focus on fewer, bigger and better products in this business unit are paying dividends and we expect these investments to continue generating returns into the critical holiday period. Moving to Global Pet Care, which is Slide 21. Third quarter results represented a record quarter for revenue and profit with reported net and organic sales growth of 8.98.3%, respectively, and adjusted EBITDA increased 29.7%. Growth in companion animal was broad based, while double digit growth in aquatics was driven by a surge in GloFish branded live fish sales, along with very strong demand for aquatic and reptile environments and systems. Higher EBITDA was driven by volume growth, productivity improvements and positive pricing, partially offset by higher tariff costs.
Q3 represented not only a record quarter, but the second seventh consecutive quarter of year over year top line growth and fifth consecutive quarter of bottom line growth despite lapping difficult double digit comparisons to the prior year. Our pet care team continues to build on our global market leadership position in our core categories of aquatics, dog chews, pet grooming and pet stain and odor. In addition to the already strong fundamentals of this business, we are especially encouraged by all the new pet parents who have recently entered the companion animal category 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. Lastly, the PetCare team began the integration of the Omega C acquisition this quarter within our existing aquatics business.
This tuck in acquisition is highly complementary to our existing portfolio with untapped global growth opportunities and is already performing well despite the COVID-nineteen challenges to the independent pet channels early in Q3. And finally Home and Garden, which is Slide 22. Third quarter reported net sales increased 4% and adjusted EBITDA increased 4.1%. Strong POS in the quarter was driven by distribution gains, new product introductions, category growth and favorable weather patterns. Net sales grew despite COVID-nineteen related supply chain disruptions.
Addressing these disruptions, we improved production output sequentially and worked diligently to fulfill the strong demand while maintaining our focus on employee safety. EBITDA increase was primarily driven by volume growth, pricing, favorable mix and productivity improvements despite headwinds from higher manufacturing costs and tariff costs and our decision to significantly increase our investment in advertising in the quarter. The third quarter, which usually represents about half of sales and EBITDA for the year, generated growth across each of the three categories in the Home and Garden business. Our largest brands all delivered strong performance as consumers spent more time at home and we experienced favorable weather patterns. Additionally, we did and will continue to invest more advertising dollars to tell our story around Spectracite Cutter and Hot Shot.
POS remained strong in July with our key retailers indicating plans to continue their seasonal support of the category through at least the end of our fiscal year. The fundamentals of this business remain strong with solid profitability and high barriers to entry. We are confident that our strong brand equities and our increased investments in product development and marketing will continue to accelerate long term growth rates. To end my section, I wanted to acknowledge another great quarter of progress on our operating culture and our strategic initiatives, and to thank our 11,000 plus employees for all they are doing to make us proud to be Team Spectrum. Now back to David.
Speaker 2
Hey, thanks Randy, Jeremy, everybody for joining us today. Given that we've covered quite a bit on today's call, I'd like to just conclude with a few takeaways on Slide 24, think it is. First, we believe our results for the quarter and the year reflect resilience and operational excellence. Second, the future of Spectrum Brands is bright with a strong demand outlook and plans to further strengthen our balance sheet and net leverage position as we invest to drive growth. Third, demand for our products accelerated across each business unit during the third quarter as we grew organic sales across most business units and demand remained strong so far in the fourth quarter.
Fourth, while our supply chain was challenged in Q3, we expect output and fulfillment rates to materially improve in the company's fourth quarter. We believe we are well positioned financially and operationally to weather the storm And we will continue to be laser focused on our employees, our consumers and our shareholders over the long term. We want to thank you for your time, your continued support and we wish you health and wellness as we go forward. I'll turn the call back to Kevin. I really appreciate everyone joining us today.
Speaker 1
Thank you, David. Angie, let's dive right into Q and A please.
Speaker 0
Absolutely. Your first question comes from the line of Nik Modi with RBC Capital Markets.
Speaker 6
Yes. Good morning, everyone. Just a couple of questions. The first is just, David, just thinking about category growth rates, and I know, obviously, you're not giving guidance, but how are you just thinking about it philosophically? What were category growth rates, obviously, prior to this whole situation?
And how do you think that's going to roll going forward? Because it's pretty clear, and I think, at least for me, pretty surprising how well the business has held up. So pretty clear it's a much more defensive portfolio. And a lot of consumer products companies that are in the staple space are probably going to see elevated levels of consumption as we move forward even past the pandemic. So I'm just trying to get your perspective around that particular dynamic.
And then just the second, just quick question is on the HHI side. Did you lose share? Because I know your leading competitor also had issues with production. So I just wanted to understand kind of what happened from a competitive standpoint around the out of stocks.
Speaker 2
Yeah, no, let's take it in reverse order. Thanks for your question, Nick. It's good to hear from you. You sound well, so that's good. Look on HHI, I think quite frankly on Price Pfister, our plumbing section, I think we're holding our own and in fact we've got some new business coming online there and so I would expect us to be able to grow share.
We definitely grew share in our hardware segment and we believe we are continuing to win there. On security, which is our biggest unit, no question, with supply disruptions and basically just the inability to get new product through our vertical integration because of mandatory closures in certain countries, we did suffer on an absolute basis. But I would tell you, I believe we're holding our own. And hopefully when we talk in ninety days, we'll be able to talk about taking share. We really, through the Global Productivity Improvement Programs, again, me back.
The employees of this company are really rising to the challenge, Nick. I mean, what's going on here is we're turning the culture. And people are really embracing the fact that we're not just making goods and services in and around the home and for pets and cleaning up your yard, but most people out there are going through a tough time. We all are. Some of these global calls I've been on with our team have really asked everyone to embrace the fact that we're not just providing goods and services, we're helping make people's lives better, helping them enjoy their pets, get the yards clean of weeds and bugs, secure their premises with the locks.
So I just feel an energy in the company right now. We're working for a bigger purpose. And so with the global productivity improvement investments in innovation, new products, and now the marketing ramping up to kind of tell the story, the team here around the table with me here in Milton, Wisconsin, they're really trying to position our business to take share. So I would tell you we're holding serve to taking share in most businesses. What I think you'll see if you really peel the onion back is when we had supply constraints, we focused on our top brands.
We wanna play to our strengths, and so mix is helping quite a bit this quarter because we do put money and emphasis behind getting Spectracide, Cutter, Repel, Kwikset, DreamBone, SmartBone, our big brands. Russell Hobbs is doing terrific by the way in The UK. So we really wanna get our big brand equities out there, tell the story and see share growth. So we're making progress. In terms of growth rates, I don't wanna kinda, I would cuff it, we were kind of a two or three percenter kind of category growth, and clearly we're seeing elevated levels of that.
But we do see this as a sustainable tailwind for the foreseeable future.
Speaker 6
Great, thanks. I'll pass it on.
Speaker 2
Thanks Nick.
Speaker 0
Your next question comes from the line of Faiza Alwy with Deutsche Bank.
Speaker 7
Yes. Hi. Good morning everyone. Good morning. So just my first question is, you know, the economic environment.
And I think the only business where, I'm wondering how cyclical that business might be and how dependent it might be on the macro environment is the HHI business. So David, I'd love your perspective in terms of how you're thinking about that business to the extent there is economic uncertainty.
Speaker 2
Well, mean, I think with 33% GDP declines, we've got plenty of uncertain economic activity and we expect HHI to grow in this current quarter. 75% of that business is replacement, repairremodel type business and we have the largest installed base in The United States Of America. We continue to be the market share leader. Yeah, I mean, look, again, I would ask you all to back up. Go back six to nine months.
This is a company that entered this fiscal year with a challenge to offset $70,000,000 of tariffs. That was the baseline. And you saw the growth we did in the second quarter. I think we grew sales 4% last quarter. We grew EBITDA over 20% in the second quarter.
That was the March. And then our boat, for lack of a better metaphor, plowed into the COVID-nineteen storm. And I think again, all credit to the team, it's been all hands on deck, everyone's paddling real hard, but I think we're navigating the economic uncertainty and the COVID-nineteen environment very, very well. And again, that's why in my opening remarks I kind of, I really wanna call your attention to all our frontline workers and our factories and distribution centers around the globe. They're just doing a remarkable job.
So, I think you should take some solace in my comment that I expect HHI to grow in Q4, and that's because we've restored our supply chain. Demand remains excellent.
Speaker 4
I think, Faiza, too, I'd also add, there's some different things happening as it relates to housing trends than just the economic numbers that you're seeing, right? There's very low inventory around the country. Home builder sentiment is strong. A lot of people are trying to flee you know, multifamily, units to get to their own homes. And right now, that's looking like good housing start indicators, which is good for the 25% of our HHI business that's exposed to that, you know, new home starts.
Speaker 7
Okay. That's that's really helpful. Just I guess my second question is, you know, you only have two months left in the year, and it seems like you have a lot of catch up to do in terms of inventory and open orders in HHI. So I'm curious about your thought process with regard to not providing specific guidance for the last remaining quarter, even if it's a wide range. So I guess where do you see the most level of uncertainty just over the next couple of months?
Speaker 4
Yeah, think it's a fair question. I think the way I would think about it though is obviously in many states here in The US, but also in some of the countries we operate in, that there are still a lot of new cases rising and there's a potential for additional shutdowns. And so while that's not impacting POS for us at this point because it remains strong, the reality is our ability to fill those orders could be temporarily impacted still if further closures were to hit us. And so we just want to be cautious as it relates to providing that financial guidance. But obviously, we're giving you the trends through July.
Speaker 7
Great. Thank you.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Bob Labeck with CJS Securities.
Speaker 8
Good morning. Congratulations on strong operating performance.
Speaker 2
Thanks, Bob. Thanks, Bob.
Speaker 8
In particular, think the margin expansion was really impressive. You talked a little bit about it and particularly in PET and HPC. So maybe you could talk a little more about the drivers for margin expansion. And if those levels, sometimes record levels, are sustainable or where they should kind of settle out, how we should think about margins in those categories going forward?
Speaker 5
Bob, this is Randy. I'll let Jeremy jump in with some more specifics. But with regards to Pet, we I think we've been talking to you guys for about four quarters now about where they were in the turnaround cycle of that business and starting to get steam from the initiatives we put in place a couple of years ago as we started globalizing that business. And so we've done a lot of work to simplify and focus on the core. We've done a lot of work at streamlining supply chains, exiting and closing excess capacity.
Lots of work there that while I'm not saying that the record level is definitely gonna continue at that rate, this is not something that was unexpected for us. We continue to see runway ahead of us in that business. And that's a business that, like all of them, are benefiting very well from our initiatives in our GPIP program. HPC is a very similar situation. There was a couple million dollars this quarter related to a tariff catch up that is a one time benefit that's flowing through.
But for the most part, again, we're about eighteen months into a new management team with a new global strategy, new operating model. And that's about the amount of time it takes to create new products and make meaningful supply chain changes. So we're excited about what's going to continue to happen on that margin expansion in both of those businesses.
Speaker 4
And I think Bob, I'll just add over time. I mean, we do think there's margin opportunity. The GPIP program thus far, a lot of the savings have gone to offset the $70,000,000 or so in tariffs this year and $50,000,000 or so last year that David has talked about. But we see opportunity as we move forward. And we're also, as David mentioned, investing 100 basis points worth of margin or 50 basis points worth of margin incremental in A and P, which we expect to drive organic growth in the future, which, again, should follow the bottom line nicely.
Speaker 8
Got it. That's great. And that kind of, segues right into my next question, which really is, and maybe talk about it little incrementally more as it relates to advertising. But the question was, how are you positioning the businesses to drive the incremental sales and continue to gain share and make this more recurring, you know, particularly for HPC beyond, you know, the initial kind of stay at home pop that you may have gotten? So like what's the opportunity set in front of you?
And how do you view this incremental advertising to continue to drive recurring purchases?
Speaker 2
It's Dave. At the end of the day, right, we have tremendous products and our innovation pipeline is strong. We've got a lot of new products coming out. The history of the company was pretty much an M and A strategy driven by me up until recently, we pivoted to organic growth and really investing behind the business. And so right now, we think we have a phenomenal opportunity.
We just launched Cutter hand sanitizer. We never had hand sanitizer before. Obviously we're trying to do the best we can to help our employees, frontline workers, people in our hospitals around the country, but also our customers now with our e commerce offering. And so, why not take that opportunity to really advertise the product, let people know that the Cutter unaided Cutter brand awareness, we want to spike it. We want people to understand that not only do hand sanitizer, but Cutter's efficacy in terms of protecting you from mosquitoes and other things is fantastic.
And so we really want to build share. And we're doing the same thing with the Spectracide. You hold the power campaigns that you see. QuickSet, we've got smart key technology that lets you change your key thirty seconds or less. We just get to tell a story better.
And so, you know, we got Microban now. So, you know, gee, it's COVID nineteen, we're all sitting here. I mean, I'm sitting here in a room with the guys and I've got my cutter hand sanitizer. We keep spraying our hands like it's going out of style. Wouldn't you feel better if you had Microban on every doorknob of your house?
It kills ninety nine point nine percent of germs. Isn't that a great segue to market that, convey that story, and convert people to the halo effect QuickSet, which oh yeah, by the way we just launched this biometric lock called Halo and we're really front and center with the whole digital lock campaign. So I just think Spectrum has a phenomenal opportunity to actually convey the message to take share and make it more permanent. God willing, we can get out of this COVID-nineteen mess as soon as possible, but I agree with your point. I think we can tell our story, take share, have a bigger portion of the shelf, and continue to follow that with innovative products that become recurring revenue streams.
Speaker 8
Great, congratulations on the quarter. It's really nice to see all the hard work playing out in the operational performance.
Speaker 2
Thank you.
Speaker 0
Your next question comes from the line of Ian Zaffino with Oppenheimer.
Speaker 6
Thank you very much. Guys, good to see how well the ecommerce business is growing. Can you maybe give us a little bit more color there? Maybe, like, what divisions are doing best there? You know, how is their share doing online?
And then maybe like what channels of online? Is it more specialty versus general e commerce? Any kind of color you could give there would be great. Thanks.
Speaker 2
Hey Ian, I'm gonna let Randy address it, but in terms of breaking it out by segment, there's certain competitive data we're not gonna wanna peel the onion so, so deep, but I'll let Randy take a swag at kinda giving you some broad strokes there. But you're not wrong. We are seeing tremendous growth in e comm and we're seeing acceleration in it. Randy, you wanna take a stab?
Speaker 5
Yeah Ian, so what I can tell you is that in the quarter, the business units that performed the strongest in year on year growth in the conversion there was our appliance business and our home and garden business. And that move in the appliance business is quite encouraging to us because a year and a half ago, that was an area where we felt like we were really losing ground. And so we've put a very specific focus with a brand new team over the last twelve months, and that's really starting to pay dividends. And it's part of our comm ops organization. So we've centralized our e commerce operations across all four businesses to ensure that we're applying best practices there.
So those two businesses have done the best. Pet, again, very strong. HHI, a little slow this particular quarter just mainly because of supply constraints. And then the other thing I would tell you is that might be helpful is that North America grew at a little faster pace than Europe, although Europe was still very strong.
Speaker 6
Okay. Thank you very much. Okay.
Speaker 0
next question comes from the line of Olivia Tong with Bank of America.
Speaker 9
Great. Thanks. Good morning. Hope everyone is well. Hi, Olivia.
Hi. How are you?
Speaker 4
We're doing well. Glad you are as well.
Speaker 9
Great. Thanks. First question for me is just if you could unpack the lost COVID related sales and profit, dollars 100,000,000 sales and $30,000,000 profit a little bit because obviously those are pretty big numbers and the margin implication is quite high. So how much of that do you think you can get back, particularly like you think about HHI, it sounds like you feel pretty good about the next couple of quarters. But then Home and Garden, obviously, there's some supply chain issues there.
Are those sales now like lost because of seasonal category? Or is there actually some catch up that you could potentially do in that category as well?
Speaker 5
So good morning, Elin. This is Randy. I would say it's a mixed bag depending upon the different businesses. And so in Home and Garden, obviously, the seasonality, we're running towards the tail end of the season, but we continue to see strong demand there. We are running all out in the supply chain and we're headed into the month of August.
That's a very, very unusual thing for us. So inventories are relatively low. I'm sure we've missed some consumer takeaway over the course of the season, but the main thing for us is ensuring that we are doing the right things for the health of the business. And so feel good about the fact that we're setting up that business to be very strong for next year. So line reviews are going well.
Relationships with retailers are going well. Our investment is growing our top brands. And so we will likely see some consumer takeaway that can't be recovered. In HHI, which was the biggest chunk of the impact in the quarter, we had a growth on our backlog of almost $40,000,000 over the course of the quarter. So that's just the delta between the orders in queue at the beginning of the quarter and orders in queue at the end of the quarter.
And so those can clearly be picked up. We also think that as the supply chain continues to replenish supply, there's a fair amount of retailer inventory that will continue to catch up. But I want to caution you that as we said in the prepared remarks, we probably won't be fully caught up on that business until we get into the early part of q one.
Speaker 9
Got it. That's helpful. And then two related questions. First, you you guys talked about how you had sold off some of your Energizer shares. If you could just talk about kind of your future plans for what's remaining of that slug?
And then strong quarter, good outlook or good indication in terms of some of the bits that you gave us. But it sounds like on share repurchase, it's still kind of taking a backseat on that. So obviously, you guys were fairly aggressive pre pandemic. So can you talk about what you need to see to get comfortable to reinstate the buyback? Is it wait until you get to the
Speaker 0
midpoint of your leverage range at the end
Speaker 9
of the year, below that? Just if you could talk through that, that would be great. Thank you.
Speaker 2
Yeah, I mean, the Energizer stake, it's just opportunistic. Obviously, March and April were periods of significant financial stress in the markets and in conjunction with kind of getting a new cash flow revolver and terming out some debt. It was leverage neutral, but it's nice to have a lot of runway. I think that was just good liability management. And so, as we look forward, quite frankly, listen, were aggressive on the repurchases early in the year.
This was the year we were gonna really deliver quite well in my opinion from the start of the year and we didn't have COVID-nineteen in the plan. And so obviously we backed off shares to kind of maximize liquidity and protect the balance sheet. I think that if you look at our peer group, our stock remains significantly undervalued. We would like to return to repurchasing. I personally would like to see EBITDA start to grow here and the leverage ratio tick down.
But we believe relative to our comp set, very attractive from a valuation standpoint both on a total enterprise value to EBITDA basis and on a free cash flow yield basis. I think people, if they do the math, will figure out we are a double digit free cash flow yield company with an improving outlook.
Speaker 9
Thanks, guys. Be well.
Speaker 4
Thanks, Olivia. You as well.
Speaker 0
Your next question comes from the line of Jim Chartier with Monness, Crespi and Hart.
Speaker 3
Hi. Thanks for taking my question.
Speaker 5
Good
Speaker 3
morning. You guys have been increasing your marketing spend for a couple of years now and then another $20,000,000 step up here. I guess, how does your marketing spend following this step up compare to your peers? How much more opportunity do you see to increase the marketing investment going forward?
Speaker 5
Yes. So Jim, this is Randy. I would tell you, our marketing spend has been relatively flat and relatively low compared to peer sets for, up until this year. And so we had planned on incremental spending this year, And David's $20,000,000 incremental is beyond that. That's a number that exceeds just the balance of this fiscal year.
But without getting into actual data, we still have a ways to go. We believe we're still well on the positive side of the ROI curve there. And we'll be looking to continue those investments. We've been very consistent that we feel like the key to strategic growth, organic growth is insights, innovation against those insights, and advertising against those innovations. And so, that's the that's the recipe across the the totality of the enterprise, and and we're we're just now kinda getting started.
Speaker 4
And just to give a little bit of specifics, Jim. So historically, the last couple of years, we've been kinda just under 1% of sales. The incremental $20,000,000 that David talked about, we'll spend around half of that this fiscal year and around half of it in the first half of next fiscal year. But we do expect this year's spend to get over the 1% of sales mark. And I would say the categories kind of vary as you look at peer group sets and some of the data is difficult to get, but there's probably still some runway for increased spending as we go forward and show success and return on that investment.
Speaker 3
Great. And then Randy, how impactful were kind of COVID related incremental costs in your manufacturing or other facilities? And then are you now kind of finding ways to reduce those maybe going forward or maybe pass them on to customers with some pricing? Thanks.
Speaker 5
Great question, Jim. We're not at the point where I think those costs passing on are part of our discussions with our customers. But they've been relatively controlled. HHI has had a fair amount because of just the extent to which we had shutdowns. But for the most part, we've been able to find offsetting efficiencies and productivity.
So those are not going to be material pieces to us going forward into next year.
Speaker 4
I think that's right. I'd also add, like a lot of companies, our travel our T and E costs are down quite a bit in the face of COVID-nineteen. That's another thing to think about as you think about a more normalized environment potentially and hopefully for next fiscal year.
Speaker 3
Great. Thanks and best of luck.
Speaker 5
Thanks, Jim. You too. Our
Speaker 0
final question comes from the line of William Reuter with Bank of America.
Speaker 10
Good morning. Good morning. The last the last couple of calls, it sounds like M and A has not been particularly active. You're gonna be investing more in advertising because it sounds like that's where you see the most opportunity right now. Are you seeing M and A opportunities right now?
And given the pretty strong demand for all your products, are you guys looking to be active there?
Speaker 2
Yes, mean, the company definitely took a break from M and A for a while. We wanna get our organic growth rate up. Global productivity improvement was a very large enterprise wide program and that's still ongoing. So the work that's been done here over the last eighteen, twenty four months is really getting our house in order, really supporting our hero brands, largest categories, and really trying to take share. So we're still, that's the number one priority is organic growth rate and sustainable free cash flow going forward.
But we did do a tuck in acquisition in our aquatics business and so we're open for business there. Never say never to anything large, but I think generally speaking, March, April, even into May, the M and A markets were pretty frozen. We definitely see them loosening up here. But again, our focus is driving shareholder value. We wanna get the leverage back down.
We wanna get EBITDA growing again. And we think we're on that trajectory right now. So stay tuned.
Speaker 10
All right. And then just as a follow-up, it's always hard to gauge the size of some of the new products, but it sounds, given the amount of time you guys have spent talking about them on this call, like it may be a greater revenue opportunity than maybe you've had in several years. I guess one, is that the case that the new innovation is a greater opportunity? And then two, do you feel like this $20,000,000 of advertising that you're going be spending, will that be paid for immediately in terms of sales? Or do you think that this is more brand building and will be paid for over time?
Speaker 2
You know, look at advertising as typically like you've gotta be involved in it for a three year kind of payback, which is not a long period of time if you think about it. But if we just take a simple example, we started turning the ad dollars on just months ago on the George Foreman smokeless grill. And that business had been kind of flat into a decline for a decade. And we're just seeing POS through the roof, not just because of COVID, we're taking a lot of market share. Our dollar market share in grills is up double digit.
And so we do believe we're seeing a very quick return on our ad dollars, but we are prepared to build that into the model going forward. And what we've done is we're using the savings generated by our global productivity improvement plan to pay that bill so that we can actually drop the incremental revenue and the contribution margin back to our shareholders. And we're in that inflection point, Q2, Q3. We would have preferred to not been interrupted by COVID-nineteen on the supply chain side. But we are seeing very fast payback.
And yeah, I think you're right. I think we have tremendous opportunity to grow Kwikset, Pfister, Spectracide, Cutter. All of our big brands have tremendous growth potential. We see that even now with DreamBone, SmartBone. There's a lot of growth under the surface and we want to demonstrate that to the investment community over the next quarters and years.
Speaker 10
Great, that's all for me. Thank you.
Speaker 0
I would now like to turn the conference over to David Moore for any additional or closing remarks.
Speaker 2
Listen, again, just thanks everybody for joining us. We believe we're on the right trajectory. I really thank all of our employees around the globe for paddling hard. And since we've reached the top of the hour, we'll conclude the conference call. Just wanna say thanks for your interest in Spectrum Brands, and we look forward to to talking to you again in the next ninety days.
Stay well, everybody. Stay safe, and we'll talk to you soon. Thanks.
Speaker 0
Thank you for participating in today's conference call. You may now disconnect your lines at this time.