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Text: I'm Kevin Kim, Divisional VP of Investor Relations and moderator for today's call.
This document will remain there following our call.
Our call will be led by David Maura, Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis, Chief Operating Officer.
Turning to slides three and four.
Actual results may differ materially.
Before I get started, I want to take a moment and speak directly to our employees and our partners around the world.
While our work is far from complete, our financial results reflect another quarter of strong top and bottom line growth and further confirm that we are structuring for growth and efficiency to serve our consumers, customers and stakeholders.
I'm also very proud of the progress we've made these past three years.
Our teams have embraced both our new global operating model and the spirit of our servant leadership culture.
They've also persevered through a global pandemic to deliver excellent and consistent financial performance for our stakeholders.
Because of you, our employees, the new Spectrum Brands has emerged a more efficient, focused, productive and consistent operating company.
We will continue to be driven by our values of trust, accountability and collaboration to serve our mission as we make living better at home.
Our latest financial results for the second quarter reflect another excellent quarter of top line growth and operating leverage.
Our investments in marketing and advertising for our trusted brands were higher in each of our business units, and this continued to drive strong demand this quarter.
Our second quarter revenue grew 22.6% as we achieved double-digit growth across all of our business units.
And our e-commerce sales grew nearly 43%.
Turning to the bottom line.
Second quarter adjusted EBITDA increased 28.8% driven by higher volumes and improved efficiencies from our Global Productivity Improvement Program.
Our operating leverage also improved despite higher inflation and incremental investments that we're making in marketing and advertising.
As we outlined during our prior earnings calls, our reinvestments continue to reignite the flywheel of new product launches, improving our top line growth, expanding our margins and driving greater profitability and cash flow generation.
If I could have everyone turn now to slide seven.
As has been well-documented, transportation and commodity-related inflation continue to negatively impact our industry.
Consistent with our highlights last quarter, we expect these headwinds to more heavily impact the second half of the year.
But despite these headwinds, our stellar first half performance and our continued organic growth give us confidence in again raising our earnings framework to reflect mid-teens net sales and adjusted EBITDA growth, adjusted free cash flow of $260 million to $280 million.
We are well positioned going into the third quarter.
And while we recognize tough comparisons as we lap last year's fourth quarter performance, we will continue to focus on disciplined execution of our winning playbook, leveraging our stable manufacturing and distribution footprint and investing behind our strong brands.
We remain laser-focused on capturing gross GPIP savings.
And in fact, our teams are targeting incremental savings for 2022.
Randy will highlight that in more detail later on.
Our new operating model and deliberate investments behind our business units over the last few years have built a stronger and much more resilient company, and we continue to expect long-term growth.
Now moving to slide eight.
Our balance sheet this quarter improved sequentially, ending the quarter with net leverage of 3.2 times and over -- and maintaining over $860 million in total liquidity.
Our actions earlier this quarter to refinance our debt are expected to reduce our annual interest expense by $18 million a year.
As a reminder, we issued $900 million of total debt with a mix of Term Loan B and a new 10-year three 7/8 senior notes, which will lower our cost of capital.
As announced in April, we are very excited to add the recent acquisition of Rejuvenate to our portfolio.
Rejuvenate is a leading developer and marketer of household cleaning products, maintenance and restoration products with an incredible loyal following.
We expect the transaction to close in the third quarter.
And this fits perfectly with our company's strategy to make living better at home, and it adds a fourth category to our Home & Garden business unit.
I'm confident in our ability to create tremendous value together.
Turning to slide nine.
Going forward, our capital allocation priorities continue to focus on: One, allocating capital internally to our highest-return opportunities, and this includes strengthening our brands through consumer insights, research and development, innovation and advertising and marketing to drive vitality and profitable organic growth; two, we plan to return cash to our shareholders via dividends and opportunistic share repurchases; third, disciplined M&A with tuck-in strategic acquisitions that are synergistic and help drive value creation.
We will continue to target a net leverage ratio in the three to 4 times range.
Now you'll hear more from Jeremy on the financials, and Randy will give you an update and additional business insights.
Over to you, Jeremy.
Turning to slide 11 and a review of Q2 results from continuing operations.
I'll begin with net sales.
Net sales increased 22.6%.
Excluding the impact of $18 million of favorable foreign exchange and acquisition sales of $26.8 million, organic net sales increased 18% with double-digit growth across all four business units.
Gross profit increased $75.1 million, and gross margin of 35.1% was in line with the year ago driven by higher volumes in all business units, improved efficiencies from our Global Productivity Improvement Program and favorable mix, offset by higher freight and input cost inflation and last year's retrospective tariff excluding benefits.
SG&A expense of $262.2 million increased 13.1% at 22.8% of net sales, with the dollar increase driven by improved volumes, higher advertising and marketing investments and incentive and distribution costs.
Operating income of $116.8 million was driven by improved volumes, improved productivity and lower restructuring costs partially offset by input cost inflation, marketing and advertising investments and incentive costs.
Net income and diluted earnings per share were primarily driven by the operating income growth and favorability from Energizer investments, offset by higher debt refinance costs.
Adjusted diluted earnings per share improved to $1.76 driven by operating income growth along with lower shares outstanding.
Adjusted EBITDA increased 28.8% from the prior year primarily driven by growth across all business units.
Turning to slide 12.
Q2 interest expense from continuing operations of $65.5 million increased $30 million due to the debt refinancing costs.
Cash taxes during the quarter of $11.9 million were $4.4 million lower than last year.
Depreciation and amortization from continuing operations of $38.7 million was $2.3 million higher than the prior year.
Separately, share- and incentive-based compensation decreased from $14.6 million last year to $8.5 million this year driven by the change to incentive compensation payout methodology we talked about last year.
Cash payments for transactions were $3.1 million, down from $6 million last year.
And restructuring and related payments were $7.6 million versus $12.8 million last year.
Moving to the balance sheet.
The company had a cash balance of $290 million and approximately $577 million available on its $600 million cash flow revolver.
At the end of the quarter, total debt outstanding was approximately $2.6 billion, consisting of approximately $2.1 billion of senior unsecured notes, $400 million of term loans and approximately $159 million of finance leases and other obligations.
Additionally, net leverage improved sequentially and was approximately 3.2 times.
During the quarter, we sold off our remaining Energizer shares for proceeds of $12.6 million.
Capital expenditures were $16.2 million in Q2 versus $13 million last year.
Turning to slide 13 and our updated earnings framework for 2021.
We now expect mid-teens reported net sales growth in 2021, with foreign exchange expected to have a positive impact based on current rates.
Adjusted EBITDA is also expected to grow mid-teens.
This includes benefits from higher volumes; our GPIP program; approximately 11 months of results from the recent Armitage transaction in Global Pet Care, offset by net tariff headwind of about $30 million to $35 million driven by the expiration of previously disclosed retrospective tariff exclusions in 2020.
In addition, as David mentioned, we have also now factored in $120 million to $130 million of input cost inflation compared to a year ago.
Fiscal 2021 adjusted free cash flow for continuing operations is now expected to be between $260 million and $280 million, up from the previous range of $250 million to $270 million.
This includes plans for incremental investments and inventory levels as well as the expected input cost inflation.
Depreciation and amortization is expected to be between $180 million and $190 million, including stock-based compensation of approximately $30 million to $35 million.
Full year interest expense is now expected to be between $130 million and $135 million.
This meaningful step-down compared to our prior range of last year is driven by our successful $900 million refinancing in February of our senior notes due 2024 and partial refinancing of our senior notes due 2025.
On a full run rate basis, as David mentioned, we expect annualized savings of approximately $18 million.
Restructuring and transaction-related cash spending is now expected to be between $70 million and $80 million.
Capital expenditures are expected to be between $85 million and $95 million.
And cash taxes are expected to be between $35 million and $40 million, and we do not anticipate being a significant U.S. federal cash taxpayer during fiscal 2021 as we continue to use net operating loss carryforwards.
We ended fiscal 2020 with approximately $800 million of usable federal NOLs.
For adjusted EPS, we use a tax rate of 25%, including state taxes.
Regarding our capital allocation strategy, we continue to target a net leverage range of 3 times to 4 times adjusted EBITDA.
As it relates to our 2021 earnings framework, please keep in mind just a few factors.
First, we continue to plan for incremental advertising investments of over $20 million in fiscal 2021 as we continue to raise awareness, consideration and purchase intent with consumers.
Second, recall the Q4 results this fiscal year will have six fewer selling days compared to the prior year.
It's important to recognize this modeling nuance.
Third, we continue to manage through inflationary pressures, which are currently expected to be $120 million to $130 million higher than the prior year.
And fourth, adjusted EBITDA is also expected to be negatively impacted by the absence of Energizer dividend income.
Now to Randy for a more detailed look at our operations.
My comments today will focus on reviewing each business unit to provide detail on the underlying performance drivers of our operating results.
And I will also update you on the current overall cost environment, progress on our GPIP program and results from our commercial operations team in e-commerce and marketing.
Overall, we continue to see significant benefits from our operating model transformation as well as the addition of new talent in many key strategic roles.
Q2 reflected another quarter of exceptional financial results with strong improvements across all four businesses.
With the backdrop of elevated demands, this quarter reflected generally improved supply chain performance and consistent service levels despite continued industry challenges.
These efforts, in addition to our continued commercial investments, helped drive another quarter of double-digit sales and adjusted EBITDA growth.
Now let's dive into the specifics of each business.
Starting with Hardware & Home Improvement on slide 15.
Second quarter reported net sales increased 18.4%, and organic net sales increased 17.4%.
Adjusted EBITDA increased 5.6% primarily driven by positive volumes and productivity improvements that were materially offset by last year's significant benefit from retrospective tariff exclusions as well as higher freight and input cost inflation, distribution costs, COVID-19-related costs and higher marketing investments.
Excluding last year's tariff exclusions, adjusted EBITDA improved 20.1%.
This represents another quarter of strong double-digit growth within HHI.
While inventory levels are improved and have normalized over the last few quarters, demand continues to outpace supply with continued strong consumer demand for our products.
This bodes well for our third quarter, especially as we are lapping last year's government-mandated shutdowns in three of our manufacturing facilities throughout Mexico and the Philippines.
We expect continued demand increases throughout the balance of 2021 driven by our new product introductions and incremental advertising investments.
Fundamentals across both the repair and remodel segment as well as the new build channels continue to be strong.
In our Kwikset business, we are focused on driving demand for Microban, which incorporates antimicrobial technology on the surface of our hardware; also SmartKey technology, which allows users to rekey their own locks to any Kwikset key in about 15 seconds; and finally, our exciting Halo Touch Smart Lock product, which includes biometric- and WiFi-enabled technology along with voice-assist capability through Alexa and Google Assistant.
As an example, the Kwikset team recently partnered with long-standing customer, Shea Homes, to begin installing Halo Touch locks on every new build as a standard home feature.
This and other similar wins with Halo platform are encouraging as we believe home automation trends will continue to drive sales for our electronics and smart connected locks.
Additionally, our Baldwin brand, which is a leader in luxury security products, launched a new quick-ship program this quarter with a wide array of SKUs shipping within five business days, dramatically improved the customer experience.
Finally, I'm also pleased to announce that Tim Goff accepted the role of President of HHI in March.
Tim is one of our top strategic leaders and most recently served as the Head of our Commercial Operations Group.
He captained the transformational benefits that, that team has had on the new SPB operating model and business results.
Tim knows the HHI business very well, having previously served as the Chief Marketing Officer and holding other supply chain, operational and sales leadership roles over the years.
We look forward to sharing more details over the coming quarters as Tim and the HHI team work to build on our leading market positions in Spectrum Brands' largest business unit.
Now to Home & Personal Care, which is slide 16.
Reported and organic net sales increased 28% and 24.3%, respectively.
Adjusted EBITDA more than doubled to $25.4 million.
Net sales were driven by continued strength in small kitchen appliances and personal care categories as well as growth across all regions.
e-commerce sales both in pure-play and retailer dotcom channels continued to grow at a high rate.
EBITDA was driven by higher volumes and productivity improvements partially offset by increased freight and input cost inflation and continued marketing investments.
Q2 represented the seventh consecutive quarter of year-over-year top line growth as momentum for our home appliances and personal care products continued well past the successful holiday season.
We've seen incremental demand in the U.S. for recent stimulus spending, and our fill rates continue to improve.
This bodes well for our plans to continue to grow sharing and shelf space with our key retailers.
However, when modeling this business, please keep in mind the inflationary headwinds within Home & Personal Care.
We expect our pricing and supplier partner initiatives will only partially offset the second half headwind.
As a result of these factors, we currently expect margin pressure in the second half, and we'll continue working to mitigate the inflation throughout the year and into fiscal 2022.
Our focus on 2021 and beyond will remain on consumer-led, insights-driven new products.
We will continue to drive those investments in our brands across more markets than ever before.
Moving to Global Pet Care, which is slide 17.
Q2 represented another strong quarter of financial performance with reported net and organic sales growth of 23.9% and 10%, respectively.
Adjusted EBITDA grew 39%.
Top line growth was driven by both our aquatics and companion animal categories with broad-based demand across subcategories and channel partners.
Higher EBITDA was driven by volume growth and productivity improvements partially offset by higher inflation and distribution expenses as well as advertising and marketing investments.
Q2 was also the tenth consecutive quarter of year-over-year top line growth and eighth consecutive quarter of bottom line growth as our existing legacy brands and recently acquired brands all performed well in their categories.
Our global pet team continues to build its worldwide market leadership position in the core categories of Aquatics, Dog Chews, Pet Grooming and Pet Stain & Odor.
You'll recall that we added Omega Sea as an acquisition last year to advance our premium aquatics offerings, and our addition of the Armitage Pet Care came earlier this year.
This is an excellent platform for international expansion, not only our dog chews business but also cat chews, treats and toys.
As we've said before, our Global Pet Care team remains confident that 2021 and beyond will benefit from the continued execution of our global strategies coupled with the very strong category growth fundamentals.
In particular, we anticipate sustained demand for our high-margin consumables given all of the new pet parents in companion animal and all the new hobbyists who have recently entered the aquatics and reptile categories.
These are long-term commitments and bode well for the future demand of our products.
And finally, Home & Garden, which is slide 18.
Second quarter reported net sales increased 21.4%, and adjusted EBITDA increased 22.7%.
The top line again grew across controls, household insecticides and repellants with strong early season orders across all channels.
EBITDA increase was driven by volume growth, favorable mix, productivity improvements partially offset by advertisement and marketing investments and higher distribution expenses.
We believe both Spectrum Brands and our key retailers are very well positioned as we enter Q3, which is historically our largest quarter for sales and profitability.
Q2 reflected another quarter of improved production capabilities to meet continued high levels of demand, which results in heavier inventory positions at retail compared to prior year.
Spring is just starting in much of the U.S., which kicks off our selling season for controls and repellants.
We are seeing good early quarter POS performance.
The weather, and thus the resulting POS performance in our peak season, remains an unknown variable.
We are very well positioned to maximize our results this year despite ongoing challenges from input and freight markets.
We're also very excited about the anticipated acquisition of Rejuvenate, a leading household cleaning, maintenance and restoration product company.
Rejuvenate has a loyal customer following and has generated impressive top and bottom line growth.
Product categories centered around floor care as well as disinfectants and kitchen and bath.
Last year's net sales were over $60 million with growing sales and margins over the past three years.
We are confident in our ability to capture operational and revenue synergies with a business that has strong EBITDA margins and customer alignment with our existing channels.
The transaction is planned to close during the third quarter, but we look forward to applying our strengths in manufacturing, marketing and sales to further strengthen the Rejuvenate brand, particularly within underpenetrated retailers.
Our continued A&P investments this quarter are consistent with our strategy to invest more resources to tell our story around brands such as Spectracide, Cutter, Hot Shot and EcoLogic, along with incremental research dollars to deliver even more new and innovative products.
We believe these actions will further enhance our mission to be a recognized market leader in providing consumers the best solutions to conquer nature's challenges and enjoy life.
This is possible with our distinctive combination of brands, formulations, registrations, supported by efficient manufacturing and strong customer relationships.
The fundamentals in this business remain very strong.
With solid profitability and high barriers to entry, we're confident that our strong brand equities and increased investments in product development and marketing will accelerate long-term growth rates.
Now let's turn to our internal growth and efficiency efforts with our Global Productivity Improvement Program, which is on slide 19.
As David mentioned, we remain laser-focused on the execution of our key initiatives in this program as Q2 delivered productivity enhancements across all business units.
We remain resolute on using the savings to reinvest back into the business to deliver long-term sustainable organic growth.
This program continues to be our most important strategic initiative as we transform to our new global operating model.
Our F '21 savings are running ahead of previous projections, and we are now raising our total gross savings target of $150 million to at least $200 million by the end of fiscal 2022.
Our confidence in raising this target is driven by strong performance from our teams and expanded scope of our existing program initiatives.
As Dave and Jeremy noted earlier, inflationary headwinds, while second-half-weighted, did begin to impact our business in this quarter.
During our call last quarter, we indicated these headwinds were $70 million to $80 million higher than we had originally planned for the year or in other words, $100 million to $110 million higher than fiscal 2020 levels.
Based on current rates as well as our improved expectations for top line growth for the year, these inflationary headwinds are now expected to be $120 million to $130 million higher in fiscal 2020 levels.
During the quarter, we actively addressed these headwinds with a coordinated and consistent strategy utilizing many of the tools developed through our GPIP program.
We are working in concert with our supplier partners to offset this inflation and have additional mitigation actions in many areas such as ocean freight and supplier management.
The agreed-upon price increases with our retail partners are going into effect now during Q3 and are expected to continue to step up during Q4.
And additionally, we anticipate further pricing discussions being necessary in the back half of the calendar year.
We believe at this point that some of these inflationary pressures are likely temporary in nature and may begin to moderate in fiscal 2022.
As Jeremy alluded to earlier, these headwinds are currently included in our earnings framework for the year, and we will remain vigilant with our operating discipline to maximize the long-term performance of our brands as a result of this.
And finally, our commercial operations team continues to drive impressive results.
This quarter, e-commerce grew by nearly 43% and represented more than 16% of our total net sales.
Additionally, our digital teams continue to leverage data for the early identification of consumer trends to seed new product and sales opportunities and create promotional content that appeals to those consumers.
Now back to David.
Earlier this year at CAGNY, at the investor conference, we shared our Spectrum Brands mission, which is we make living better at home.
And as I shared earlier, we are a more efficient, focused, productive and consistent operating company.
Given that we've covered a lot on the call, let's conclude with a few takeaways on slide 21.
First of all, our second quarter financials reflect another excellent quarter of top line growth.
Investments in marketing and advertising for our trusted brands were higher in each division, which helped drive double-digit top line growth across all of our business units.
Second, our second quarter financials reflect another quarter of operating leverage, with adjusted EBITDA increasing 28.8% from the prior year with growth across all businesses.
Thirdly, our balance sheet improved sequentially, ending the quarter with net leverage of 3.2 times with over $860 million in total liquidity.
Additionally, our successful debt refinancing actions this quarter are expected to drive a material step-down in our interest expense.
I'm extremely grateful for all the sacrifices you have made to navigate our company successfully through these challenging times.
Francis, let's just dive right into Q&A.

user
compname reports q2 adj earnings per share of $1.76.
q2 adjusted earnings per share $1.76.
qtrly net sales $1.15 billion, up 22.6%.
now expects mid-teens reported net sales growth in fiscal 2021.
adjusted ebitda is also expected to increase mid-teens in fiscal 2021.
adjusted free cash flow is now expected to be between $260 million and $280 million in fiscal 2021.

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