Spectrum Brands Holdings Reports Fiscal 2023 Third Quarter Results

Spectrum Brands Holdings, Inc. (NYSE: SPB; “Spectrum Brands” or the “Company”), a leading global branded consumer products and home essentials company focused on driving innovation and providing exceptional customer service, today reported results from continuing operations for the third quarter of fiscal 2023 ended July 2, 2023.

“I am proud of our global Spectrum Brands team for all their efforts and tireless dedication to the Company. We have been challenged by a number of unanticipated developments throughout this year, including lower consumer demand resulting in significant sales volatility to our retail customers, cooler weather in the third quarter exacerbating this trend for our Home and Garden business, and the DOJ lawsuit to block the sale of our HHI business unit.“ said David Maura, Chairman and Chief Executive Officer of Spectrum Brands.

"While we are disappointed with our top-line performance in the quarter, I am pleased with the fact that our focus on profitability is paying off as we exceeded third quarter EBITDA expectations, excluding investment income. We expect some of these short-term demand headwinds to continue in the fourth quarter and, therefore, expect to be towards the lower end of our earnings framework, excluding the investment income from the HHI proceeds. We also believe there is still excess inventory in the retail channel as well as our balance sheet, particularly in kitchen appliances. Going into fiscal 24, one of our goals is to continue to improve the health of our inventory."

Mr. Maura continued, "with the close of the HHI transaction, we have become a net debt free company. Our balance sheet is stronger than it has ever been and we have taken a major step in the direction of becoming a faster growing, higher margin, pure play Global Pet Care and Home & Garden company. We have also repaid $1.6 billion of our outstanding debt and are returning capital to shareholders through a $500 million accelerated share repurchase program. In addition, our team is now able to refocus all their energy on our core businesses and with the stronger balance sheet, we believe we are very well positioned to drive long-term growth and profitability."

Fiscal 2023 Third Quarter Highlights

• Net sales decreased 10.1% with a decrease in organic net sales of 9.7%, excluding the impact of $3.5 million of unfavorable foreign exchange rates. Net sales declined due to retailer inventory management strategies and slower than expected category POS, offset by positive pricing adjustments.
• Gross profit decreased due to reduced volume while gross profit margin increased from the improved pricing, cost improvements, and favorable mix.
• Operating loss increased with the recognition of a goodwill impairment of $111.1 million, intangible asset impairment of $53.7 million and prior year gain from remeasurement of contingent gain liability partially offset by lower distribution costs, fixed cost reduction efforts, and reduced project spend on restructuring, optimization and strategic transaction initiatives.
• Net loss increase and diluted earnings per share decrease from continuing operations were primarily driven by the increase in operating loss and interest costs.
• Adjusted EBITDA increased 23.0% and adjusted EBITDA margin increased 360 basis points attributable to lower distribution costs, fixed cost reduction initiatives and positive pricing impact, partially offset by the reduction in sales volume.
• Adjusted diluted EPS increased to $0.75 per share due to higher Adjusted EBITDA and a reduction in outstanding shares.

Fiscal 2023 Third Quarter Segment Level Data

Global Pet Care (GPC)

The decrease in net sales was mainly driven by continued softness in the global aquatics category, especially in the subcategory of equipment and environments. Companion Animals category grew in the EMEA and Latin America regions but declined in North America partially due to aggressive portfolio management which resulted in the decision to exit several non-strategic categories. Sales in EMEA increased due to growth in Companion Animal category driven by strong dog and cat food sales. The sales were also helped by prior year price increases and new positive pricing adjustments in EMEA. Organic net sales decreased 6.4%, excluding favorable foreign currency impacts of $0.8 million.

Operating income, Adjusted EBITDA and margins increased due to lower distribution costs compared to prior year disruptions, positive pricing adjustments, savings from prior year cost reduction initiatives, and additional cost reduction actions in the current year. This was partially offset by lower volumes.

Home & Garden (H&G)

The net sales decrease was primarily driven by unanticipated adverse weather leading to lower POS and lower than expected replenishment orders for the pest control category. Lower than anticipated POS late in the quarter also drove retailers to continue to be conservative with their inventory planning and to further reduce inventory. Cleaning products sales increased by low single digits, but the category POS remained challenged as consumer demand for cleaning products continues to decline post COVID and the performance in the category remains below expectations.

The lower operating income, Adjusted EBITDA and margins were driven by the impact of the sales decline and continued inflation partially offset by positive pricing, benefits of prior year fixed cost restructuring and operational cost reductions from cost improvement initiatives. Operating income was also impacted by impairment of intangible assets.

Home & Personal Care (HPC)

The decrease in net sales is primarily due to category decline from lower consumer demand in kitchen appliances. Sales in International markets grew across Personal Care and Kitchen Appliances categories. However, sales in North America were lower due to lower consumer demand, increased competitive activities and continued retailer inventory management. Organic net sales decreased 14.7%, excluding unfavorable foreign currency impact of $4.3 million.

The operating loss was driven by impairment of goodwill and intangible assets as well as lower volume. The increase in Adjusted EBITDA and margins is driven by cost improvement initiatives, including reduction of operating expenses initiated in the prior year and additional actions undertaken during the second quarter of fiscal 23, positive pricing and favorable cost environment from ocean freight declines. This was partially offset by unfavorable foreign currency in LATAM and lower volume.

Liquidity and Debt

As of the end of the quarter, the Company had a cash balance of $2,930 million and $2,101 million of debt outstanding, consisting of $2,012 million of senior unsecured notes and $89 million of finance leases. Subsequent to the end of the quarter, the Company paid down an additional $450 million of senior unsecured notes, which were callable at par.

The Company ended the quarter in a net positive cash position, compared to a proforma net leverage of 6.3 times at the end of the previous quarter.

Fiscal 2023 Earnings Framework

Spectrum Brands continues to expect reported net sales to decline by mid single-digits in Fiscal 2023, with foreign exchange expected to have a negative impact based upon current rates. Fiscal 2023 Adjusted EBITDA, excluding investment income, is expected to decline by low to mid single-digits.

From a capital structure perspective, while we are currently in a net cash position, the Company is targeting a long-term net leverage ratio of 2.0 - 2.5 times after full deployment of HHI sale proceeds.

Conference Call/Webcast Scheduled for 9:00 A.M. Eastern Time Today

Spectrum Brands will host an earnings conference call and webcast at 9:00 a.m. Eastern Time today, August 11, 2023. The live webcast and related presentation slides will be available by visiting the Event Calendar page in the Investor Relations section of Spectrum Brands' website at www.spectrumbrands.com. Participants may register here. Instructions will be provided to ensure the necessary audio applications are downloaded and installed. Users can obtain these at no charge.

A replay of the live broadcast will be accessible through the Event Calendar page in the Investor Relations section of the Company’s website.

About Spectrum Brands Holdings, Inc.

Spectrum Brands Holdings is a home-essentials company with a mission to make living better at home. We focus on delivering innovative products and solutions to consumers for use in and around the home through our trusted brands. We are a leading supplier of specialty pet supplies, lawn and garden and home pest control products, personal insect repellents, shaving and grooming products, personal care products, and small household appliances. Helping to meet the needs of consumers worldwide, Spectrum Brands offers a broad portfolio of market-leading, well-known and widely trusted brands including Tetra®, DreamBone®, SmartBones®, Nature’s Miracle®, 8-in-1®, FURminator®, Healthy-Hide®, Good Boy®, Meowee!®, OmegaOne®, Spectracide®, Cutter®, Repel®, Hot Shot®, Rejuvenate®, Black Flag®, Liquid Fence®, Remington®, George Foreman®, Russell Hobbs®, Black+Decker®, PowerXL®, Emeril Lagasse®, and Copper Chef®. For more information, please visit www.spectrumbrands.com. Spectrum Brands – A Home Essentials Company™

Non-GAAP Measurements

Management believes that certain non-GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Within this document, including the tables that follow, reference is made to organic net sales, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted EBITDA margin, and adjusted earnings per share (EPS). Management believes that organic net sales provide for a more complete understanding of underlying business trends of regional and segment performance by excluding the impact of foreign currency exchange fluctuations and the impact of acquisitions (when applicable) when there is no comparable sales in the prior period. Organic sales growth is calculated by comparing organic net sales to net sales in the prior comparative period. The effect of changes in foreign currency exchange rates is determined by translating the period’s net sales using the foreign currency exchange rates that were in effect during the prior comparative period. Adjusted EBITDA is a metric used by management to evaluate segment performance and frequently used by the financial community, which provides insight into an organization’s operating trends and facilitates comparisons between peer companies, because interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure for determining the Company's debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. Adjusted EBITDA margin reflects adjusted EBITDA as a percentage of net sales. Management uses adjusted diluted EPS as a useful measure for providing further insight into our operating performance because it eliminates the effects of certain items that are not comparable from one period to the next. An income tax adjustment is included in adjusted diluted EPS to exclude the impact of the valuation allowance against deferred taxes and other tax-related items in order to reflect a normalized ongoing effective tax rate of 25.0%. The Company provides this information to investors to assist in comparisons of past, present and future operating results and to assist in highlighting the results of on-going operations. While the Company's management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace the Company's GAAP financial results and should be read in conjunction with those GAAP results. Supplemental tables have been provided within the Appendix to this document to demonstrate reconciliation of non-GAAP measurements to the most comparable GAAP measure.

Forward-Looking Statements

We have made or implied certain forward-looking statements in this document. All statements, other than statements of historical facts included or incorporated by reference in this document, including, without limitation, statements or expectations regarding our business strategy, future operations, financial condition, estimated revenues, projected costs, inventory management, earnings power, projected synergies, prospects, plans and objectives of management, outcome of any litigation and information concerning expected actions of third parties are forward-looking statements. When used in this document, the words future, anticipate, pro forma, seek, intend, plan, envision, estimate, believe, belief, expect, project, forecast, outlook, earnings framework, goal, target, could, would, will, can, should, may and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

Since these forward-looking statements are based upon our current expectations of future events and projections and are subject to a number of risks and uncertainties, many of which are beyond our control and some of which may change rapidly, actual results or outcomes may differ materially from those expressed or implied herein, and you should not place undue reliance on these statements. Important factors that could cause our actual results to differ materially from those expressed or implied herein include, without limitation: (1) the COVID-19 pandemic, economic, social and political conditions or civil unrest, terrorist attacks, acts of war, natural disasters, other public health concerns or unrest in the United States or the international markets impacting our business, customers, employees (including our ability to retain and attract key personnel), manufacturing facilities, suppliers, capital markets, financial condition and results of operations, all of which tend to aggravate the other risks and uncertainties we face; (2) the impact of a number of local, regional and global uncertainties could negatively impact our business; (3) the negative effect of the armed conflict between Russia and Ukraine and its impact on those regions and surrounding regions, including on our operations and on those of our customers, suppliers and other stakeholders; (4) our increased reliance on third-party partners, suppliers and distributors to achieve our business objectives; (5) the impact of expenses resulting from the implementation of new business strategies, divestitures or current and proposed restructuring and optimization activities, including changes in inventory and distribution center changes which are complicated and involve coordination among a number of stakeholders, including our suppliers and transportation and logistics handlers; (6) the impact of our indebtedness and financial leverage position on our business, financial condition and results of operations; (7) the impact of restrictions in our debt instruments on our ability to operate our business, finance our capital needs or pursue or expand business strategies; (8) any failure to comply with financial covenants and other provisions and restrictions of our debt instruments; (9) the effects of general economic conditions, including the impact of, and changes to tariffs and trade policies, inflation, recession or fears of a recession, depression or fears of a depression, labor costs and stock market volatility or monetary or fiscal policies in the countries where we do business; (10) the impact of fluctuations in transportation and shipment costs, fuel costs, commodity prices, costs or availability of raw materials or terms and conditions available from suppliers, including suppliers’ willingness to advance credit; (11) interest rate fluctuations; (12) changes in foreign currency exchange rates that may impact our purchasing power, pricing and margin realization within international jurisdictions; (13) the loss of, significant reduction in or dependence upon, sales to any significant retail customer(s), including their changes in retail inventory levels and management thereof; (14) competitive promotional activity or spending by competitors, or price reductions by competitors; (15) the introduction of new product features or technological developments by competitors and/or the development of new competitors or competitive brands; (16) changes in consumer spending preferences and demand for our products, particularly in light of economic stress and the COVID-19 pandemic; (17) our ability to develop and successfully introduce new products, protect intellectual property and avoid infringing the intellectual property of third parties; (18) our ability to successfully identify, implement, achieve and sustain productivity improvements, cost efficiencies (including at our manufacturing and distribution operations) and cost savings; (19) the seasonal nature of sales of certain of our products; (20) the impact weather conditions may have on the sales of certain of our products; (21) the effects of climate change and unusual weather activity as well as our ability to respond to future natural disasters and pandemics and to meet our environmental, social and governance goals; (22) the cost and effect of unanticipated legal, tax or regulatory proceedings or new laws or regulations (including environmental, public health and consumer protection regulations); (23) public perception regarding the safety of products that we manufacture and sell, including the potential for environmental liabilities, product liability claims, litigation and other claims related to products manufactured by us and third parties; (24) the impact of existing, pending or threatened litigation, government regulation or other requirements or operating standards applicable to our business; (25) the impact of cybersecurity breaches or our actual or perceived failure to protect company and personal data, including our failure to comply with new and increasingly complex global data privacy regulations; (26) changes in accounting policies applicable to our business; (27) our discretion to adopt, conduct, suspend or discontinue any share repurchase program or conduct any debt repayments, redemptions, repurchases or refinancing transactions (including our discretion to conduct purchases or repurchases, if any, in a variety of manners including open-market purchases, privately negotiated transactions, tender offers, redemptions, or otherwise); (28) our ability to utilize net operating loss carry-forwards to offset tax liabilities; (29) our ability to successfully integrate the February 18, 2022, acquisition of the home appliances and cookware products business from Tristar Products, Inc. into the Company's Home and Personal Care ("HPC") business and realize the benefits of this acquisition; (30) our ability to successfully integrate the May 28, 2021 acquisition of the Rejuvenate business and tradename from For Life Products, LLC into the Company's Home & Garden ("H&G") business and realize the benefits of this acquisition; (31) our ability to separate the Company's HPC business and create an independent Global Appliances business on expected terms, and within the anticipated time period, or at all, and to realize the potential benefits of such business; (32) our ability to create a pure play consumer products company composed of our Global Pet Care ("GPC") and H&G business and to realize the expected benefits of such creation, and within the anticipated time period, or at all; (33) our ability to successfully implement further acquisitions or dispositions and the impact of any such transactions on our financial performance; (34) the impact of actions taken by significant stockholders; and (35) the unanticipated loss of key members of senior management and the transition of new members of our management teams to their new roles; and (36) the other risk factors set forth in the securities filings of Spectrum Brands Holdings, Inc. and SB/RH Holdings, LLC, including the 2022 Annual Report and subsequent Quarterly Reports on Form 10-Q.

Some of the above-mentioned factors are described in further detail in the sections entitled Risk Factors in our annual and quarterly reports, as applicable. You should assume the information appearing in this document is accurate only as of the end of the period covered by this document, or as otherwise specified, as our business, financial condition, results of operations and prospects may have changed since that date. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the United States Securities and Exchange Commission , we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.