Spectrum Brands Holdings, Inc. Q2 FY2025 earnings call

Economic Market Situation and Impact

• The world has changed dramatically since the last quarter, with volatile tariff situations and consumer demand uncertainty. Despite this, the company is encouraged by opportunities ahead with a strong balance sheet, cash flow, resilient team, and important brands.

Operating Performance and Strategic Initiatives

• Global Pet Care: GPC is diversifying its global sourcing footprint, with major suppliers outside of China, and expects to have sourcing alternatives outside of China for all but about $20 million of its total GPC purchases for the US market by the end of the fiscal year. It is investing in brand - building and innovation, such as the Good and Fun national ad campaign and new product launches in various categories.
• Home and Garden: Had a good quarter with retailers prebuilding for the season. Excited about the innovation pipeline, including the Spectracide one - shot product line and new trap launches. Adjusted EBITDA was affected by lower volumes and other factors but expects the season to be generally good.
• Home and Personal Care: Focused on driving sales in international markets while selling remaining inventory in the US and maximizing cash flow. Actively managing costs and accelerating plans to exit Chinese sourcing for the US market. Adjusted EBITDA was impacted by multiple factors, but is working on improving the situation.

Strategic Priorities

• Focus on protecting the balance sheet and running the business for free cash flow generation. Utilizing supply chain capabilities to transition China - sourced products to other sources. Focused on cost reduction efforts, including pulling back on some advertising and marketing investments in the short term. Preparing the business to emerge from economic uncertainty as a growing stronger company, with a new leader for the global pet division and plans to expand the pet asset through organic growth and acquisition. Delayed strategic transaction for HPC due to tariff landscape and geopolitical factors, but will continue to hold and operate the business and seek opportunities to maximize its value.

Share Repurchases

• During the second quarter, repurchased approximately 2 million shares. Year - to - date through the call, purchased approximately 3.2 million shares for $260 million. Still have approximately $140 million remaining on the share repurchase authorization, being disciplined to preserve the strong balance sheet and liquidity.

Global Pet Care (GPC)

• Reported net sales decreased 7.1% excluding unfavorable foreign currency impacts, with organic sales down 6.3%. Adjusted EBITDA was $50 million, $12.3 million lower than last year, driven by lower sales volumes, inflation, incremental trade promotions, and unfavorable mix, offset by operational productivity improvements and other favorable variances. Revenue contribution: GPC's performance is a significant part of the company's overall revenue.

Home and Garden (H&G)

• Net sales decreased 5.2% in Q2 due to timing shifts in seasonal prebuilds. First - half net sales increased 5% over last year. Adjusted EBITDA was $26.7 million, compared to $29.2 million last year, driven by lower volumes, incremental brand - building investments, negative mix, and inflation offset primarily by cost improvements. Revenue contribution: H&G is an important segment with its own sales dynamics.

Home and Personal Care (HPC)

• Reported net sales decreased 5.1%, and excluding unfavorable foreign exchange, organic net sales decreased 2.2%. Adjusted EBITDA was $7.3 million compared to $17.8 million in the prior year. Adjusted EBITDA margin was 2.9% compared to 6.6% last year, driven by lower volumes, higher trade promotions, unfavorable mix, incremental tariffs, and inflation offset by cost improvement initiatives, lower brand - focused investments, and foreign exchange. Revenue contribution: HPC has its own revenue proportion within the company.

Guidance

• Given the unprecedented global tariff situation, unpredictable nature of global trade negotiations, and softening of US and European consumer demand, Spectrum Brands does not believe it has sufficient visibility to continue providing an earnings framework for fiscal 2025. However, it is expecting to generate approximately $160 million of free cash flow for the year, actively managing its spend and working capital. It targets free cash flow for the year of approximately $160 million or $6 to $7 per share in free cash flow.

Risks

• Tariff Uncertainty: Unpredictable tariff situations, including the current high tariffs on Chinese goods and the potential for additional tariffs, which could impact costs and profitability. The company's ability to offset these costs and continue to source product is uncertain.
• Consumer Demand Weakness: Softening consumer demand in certain regions and categories, such as the weakening of US consumer sentiment and EMEA consumer sentiment deterioration, which can affect sales and revenue.
• Supply Chain Transition Challenges: Transitioning supply chains out of China involves challenges such as finding new suppliers, going through quality checks, and dealing with the complexity of SKU rationalization, which can impact product availability and costs in the short term.

Q: Hi. Good morning. It's Pete Lucas actually, it's Pete Lucas this morning for Bob. How are you doing? You guys good. You guys covered a lot in the prepared remarks. Thank you. Crossed off a lot of my questions here. But just wanted to see, I guess, in terms of from a sourcing perspective, any areas where you see you're competitively advantaged versus your peers given the new landscape or kinda think of it as everybody in the same boat?

A: You know, I'll let Jeremy take the details, but just real brief. I mean, listen. What we're trying to say to everybody today is, look. It's gonna be a little choppy given the tariff situation over the next six months. But you know, I'm thrilled to be able to talk to you today and say, look. You know, HPC is gonna have no China source exposure in six months. We'll be down to less than $20 million, you know, coming out of the pet business. And so our appliance business US is the one that needs the help, and we're gonna, you know, have that ramped up pretty aggressively by the end of the year. So the fact that we get 80% of the appliance profits internationally is just a that is a competitive advantage to us as you talk about. And like I said too, I really believe it's gonna bring strategic opportunity. That'll take a little bit longer. But, we're just fantastically positioned to deal with this. Jeremy, I don't know if you wanna follow - up. Jeremy: Yeah. The only thing I would add is one, I've I started kinda the opposite way you asked the question, Pete, and I'll come back to this. One, the good news is the level the playing field is level, I think, for everybody. We're not disadvantaged anywhere. Where I do think we're advantaged is quite frankly our scale. So, you know, if you think about some of our larger brands, Black and Decker is a $400 million brand. Good and Fun is over a $250 million brand. That's significant volume for factories that are being set up or expanded outside of China. And I do think that as David said in prepared remarks, we'll likely be at the front of the line as it relates to getting that volume more quickly.

Q: So Jeremy, I appreciate all the color on the tariffs, and I know there's a lot of moving pieces. But just as we think about the model, is there any way to frame what, like, the gross impact could be? And then maybe as you think about the kind of mitigation actions, like, what that figure could be on a net basis?

A: Yeah. And I don't think there's any way to give absolute numbers on it because we are as we talked about, we've pivoted our operating strategy. And so you know, we've talked with everybody, Peter, as you know, of sourcing roughly $300 million of finished product you know, with about a hundred million as we started the year for pet out of China for the US market and roughly 200 million for HPC. So you can do rough math and say without changing your operating model, what would that gross impact look like? But in reality, as David said, we've stopped ordering from China immediately. We haven't ordered anything for five weeks. So that's not a reality for us. So, you know, I think you really have to go business by business as we did in our prepared remarks and say, look. You know, Home and Garden don't really don't expect an impact. There will be some impact as we get to the later part of the year on a gross basis, but we are gonna price for it, and we don't expect really much of a net impact even this year. But for PET and HPC, it's something different. You know, if this tariff stays in place at a 45 to a 70%, you know, we won't have product to sell all the demand in the US market in Q4. Neither will our retail customers and neither will most of our competitors. And so that's where it's very difficult in the short term to talk about the net impact. In addition to that, we are seeing signs of consumers in the US especially and now starting in Europe to pull back given all this uncertainty. That's another reason why you know, I'm very hesitant to give you a short - term net number because I just don't think it's appropriate given the uncertainties. But, hopefully, that level of color helps. And the other thing I would say is, look. I know it's difficult for everybody, buy on sell side when companies withdraw. Their guidance. So just give a little bit of color since we're on the public call. As we sit here today, you know, I don't expect a lot to change in our operations sequentially from Q2 to Q3. So I would expect Q3 to look relatively similar to Q2 with the seasonal ramp - up in H&G. The big question comes in Q4 around how much demand is there out there, how much product, you know, do we have, what happens on retail shelves, as product starts to dwindle in the US market? And that's what we'll have to watch more closely. But as David said, I think we are well - positioned. We're super encouraged by where we're gonna be with H&G and GPC just at the end of the fiscal year. And so I think the impact moderates very quickly as we ramp up 2026. And HPC, just for us, but for the entire category and for all the US consumers, it's gonna be fascinating to watch what happens at this level of tariffs. David: Yeah. I mean, Peter, just to close it out. Right? We're trying to give you full color. So you know, just a couple of months ago, we had a hundred million bucks of exposure in our pet business. Right? We've got that down to 75, and we'll be down to less than, you know, 20 million or less. You know, in six months. So, I mean, really mitigating, you know, any impact to pet very quickly. You know, Home and Garden, we have small exposure, but, you know, gonna price what we can't get out of there now. We're gonna be out and have, you know, no exposure to China, you know, entering fiscal 2026. So what we're trying to say, we're trying to keep the earnings power right, of our two bigger businesses, home and garden and pet intact. We can enter into '26, get back to growth, and have a really nice year in '26. HPC, the way I'm mitigating that tariff, you know, that Jeremy talked about I'm just not buying for the US market. And, you know, until the administration changes its stance, or we have supply outside of China, gonna liquidate the US piece. But the beauty is I'm making 80% of the profits of that business outside of the States. And that's what we're trying to be very clear on today.

Q: Great. Thank you. You mentioned that for some products, you're either staying in China or exiting the US business. Can you talk about what percent of your sales are in these products? Then for the production that's moving out of China, are you working with new suppliers that you'll have to onboard and bring up to speed or the same ones that are just moving their operations? And since you're still hoping for an exit of HPC longer term, how do you think about sort of your willingness to invest significant time, effort to find alternative sourcing for much of that business?

A: Morning, Olivia. I'll do it in reverse order, and I had a little trouble on your first question. If I get it wrong, please, restate it. So on HPC, look. We have a strong management team in that business. We have it, you know, integrated with our corporate enabling functions, including supply chain and sourcing. And we have, you know, the desire, the energy, the capability to tackle this problem inside our four walls, and we'll certainly do that. You know, where we and we will deploy some capital for tooling, in new factories, but it's nominal compared to the benefit that it will bring us. And so we are definitely committed to doing that. And riding the ship for the business as it relates to the US market. And thankfully, as David said, you know, 80% of the profits are outside of the US. So we will do that. You know, what we're not focused on is acquisitions in that space. Second question sorry. Bear with me. So the second question was... Olivia: Oh, what percent of your sales are in the products that you said that you're either exiting or you're staying in China? And are you working with new suppliers? Jeremy: Yeah. So, on the second one there so I would say that there are some new suppliers, but the vast majority are existing suppliers who already have a presence in other countries, in Asia and some even in Mexico, and some are setting up, actually new factories that have already been in process before this tariff situation evolved. So there's not a lot of ramp - up with brand new suppliers, though there is a lot of quality work that has to happen in new factories or factories that are expanding outside of China. As it relates to the product that we referenced that, you know, may not move, what I would say is that's probably as we sit here today, and this is gonna change because you know, we're just a few weeks into this. But it's probably 15 to 20% or so of the HPC US - related products as we sit here today, we're putting those, you know, lower at the bottom of the list. You know, margins are lower. They're smaller SKUs with less revenue impact, not as impactful as the ones we're prioritizing. So that's really it. Olivia: Got it. If I could follow - up on free cash flow, can we talk about the building blocks to get to your guide? Obviously, usually, you generate the vast majority of your free cash flow in the second half. But would have assumed that there is also some forward buying of inventory from your side that's weighing on results, certainly looking at the working capital usage year to date. Seems to be the case. So just talk through, if you wouldn't mind, building blocks for your free cash flow.

A: Sure. Yeah. We actually didn't do any significant forward buying as it relates to the tariff situation. The build in inventory that you see in the first half of the year is pretty much entirely focused on the home and garden seasonal build that we do every year, and that's mostly internal in our own factory. So we didn't do a lot of that. You know, the building blocks, I mean, we obviously have a point of view on profitability for the year, though there's probably more variability in that than there usually would be halfway through the year. And then what we have is, you know, a vision of where we can go from a cost management perspective, so managing our spend and also working capital. Know, as David talked about, when we stopped ordering, particularly in the HPC business for the US market. I mean, what that means is that we are selling off the inventory and not replenishing it. And as we get to the fourth quarter, we expect to be collecting a lot of those receivables of sales from Q3 that should benefit us from a receivables perspective in the second half of the year. So that's really how we built that. We have a lot of confidence in it. We really wanted to put it out there as a stake in the ground for our shareholders, quite frankly, to understand where we're at, what we're doing, and the valuation of the company.