Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Spectrum Brands Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today to Kevin Kim, DVP of Investor Relations. Thank you. Please go ahead sir.

Thank you, Dalam. Welcome to Spectrum Brands Holdings fiscal 2020 Q2 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 Investor Relations 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 Maura, Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis Chief Operating Officer. After their opening remarks, we will conduct the Q&A session. Turning to slides 3 and 4. 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 April 30, 2020 and our most recent SEC filings and Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We assume no obligation to update any forward-looking statement. 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 8-K filings, which are both available on our website in the Investor Relations section. Now, let me turn the call over to David Maura.

Hey. Thank you, Kevin. Good morning, everybody. I appreciate everybody for joining us this morning. I certainly hope this call finds you all well and safe during these times. Before we start the call, it's really important to me and it's very hard for me to convey over an earnings conference call the gratitude I feel toward all of our employees. I really would be remiss not to say a huge thanks to everybody in Spectrum Brands all of our employees and associates globally. I'm extremely proud of the amazing way the Spectrum Brands family has come together and taken steps to protect not only our people, our company, but also to serve our retail customers consumers and our communities quite frankly around the globe. I am extremely proud of the response, the proactive steps and the collaboration that this team called Spectrum Brands has demonstrated. We have acted perhaps more united more cohesive as a team than we ever have before. And I'm just -- I'm thrilled to see evidence of servant leadership and empowering and encouraging and inspiring our teams honestly in the U.S., Europe, the world over. So a really big thank you from me from the bottom of my heart to all of our employee associates and partners in Spectrum Brands. I couldn't be more proud. Thank you. Now to turn to the quarter. At Spectrum Brands, we are in an extremely fortunate position. We are not only diversified with four different business units, but all of our four operating companies have been deemed essential during this time. We are open for business. We are producing. We are selling to our customers. The majority of our customers also have been deemed essential in this time of crisis. So all four of our business units frankly revolve…

Thanks, David. Good morning everyone. If you could please turn to slide 10 and a review of our Q2 results from continuing operations beginning with net sales. Net sales increased 3.4% excluding the impact of $7.3 million of unfavorable foreign exchange and acquisition sales of $800,000. Organic net sales increased 4.1% with growth in Global Pet Care, HPC and Home & Garden offset by a slight decline in HHI. Gross profit increased $23.4 million with the largest driver being the tariff-related benefit David mentioned of $8.4 million. This is essentially a recovery of tariffs paid over the last 18 months as a temporary exclusion was granted in February related to certain products and SKUs in our HHI business, going back 18 months and expiring this coming August. You should note that it is a cash benefit and would have resulted in higher margins over the past five quarters. Gross margin of 35.1% increased 140 basis points, primarily related to the tariff benefit. SG&A expense of $231.9 million increased just over 1% at 25% of net sales this year compared to 26% a year ago, driven by lower operating expenses. Operating income was driven by the increase in sales and gross profit and in addition there was recognition of a $7 million gain adjustment on the final disposition of the European dog and cat food manufacturing operations offsetting higher GPIP restructuring costs. Net loss and diluted earnings per share were driven by a loss on our Energizer common stock holding, despite an increase in operating income, lower interest expense and shares outstanding. Adjusted diluted EPS was up 248% attributable to improved operating income, the lower interest expense and lower shares outstanding. Adjusted EBITDA increased nearly 22% growth in HHI, Global Pet Care and HPC offset by a slight decline in Home…

Thanks, Jeremy. Good morning everyone and thank you all for joining us. My comments today will focus around our operational performance in Q2, including the impacts of COVID-19. The progress we've made on our Global Productivity Improvement Program. And a review of each business unit to provide you more detail, on the underlying drivers of the performances. So as David mentioned, Q2 represented a very challenging environment for managing all aspects of our business in response to the COVID crisis. I have been incredibly pleased with how all areas of our organization have responded. And as a result the financial impacts of COVID-19 on our Q2 performance were relatively small as you heard from Jeremy. In the back half of the fiscal year we do expect to see more impact from both supply and demand that will vary by business unit. Early in this quarter in response to the coronavirus the Chinese government extended the Lunar New Year and shut down operations. This did create delays for us in our supply base in China. But mainly attacks our safety stocks on many finished goods and components. However we are pleased to report, that by the end of the quarter our Chinese factories and our Chinese supply partners were at or near full capacity, as that country returned to work. While this may create near-term delays for the third quarter while products are in transit we believe that if the current situation holds those issues are largely manageable. Towards the end of March and into early April we saw government restrictions impact our HHI facilities in the Philippines and Mexico. These orders limited us or required us to limit production capabilities, in our Philippines factory and in one of our Mexico factories, while requiring us to temporarily suspend operations, at another…

Thanks very much Randy. Thank you, Jeremy. Thanks everyone on the call. Look we've covered quite a bit today. And so what I'd like to do if I could is, I'd like to just conclude with kind of the key takeaways in my mind. First our Global Productivity Improvement Program and the action we've taken over the last 24 months are really paying off and they are reflected in the strong performance that we just reported. Make no mistake about it. The performance that we just reported is a direct result of the seeds of investment that we began planting in our business over 24 months ago. We remain absolutely committed to this program, which we believe is the foundation for the long-term growth of our company. Second, in terms of our financial performance this quarter, I am thrilled that we had both top and bottom line growth before and during the first part of the COVID-19 pandemic. I am very pleased that at the end of the second quarter we are tracking ahead of our earlier expectations. Third, our global teams demonstrated strong operational excellence across the board including our response to the COVID-19 pandemic. I have to pause here and it's not in the script, but I really need to thank Rebeckah Long, who runs HR for us and our global COVID-19 response group, really done a fantastic, fantastic job. So hats off to all of you. Thank you. I'm indebted to you. I'm personally extremely proud of all of you for your help over the last six weeks it's been amazing. Fourth, we are very, very well-positioned from a balance sheet perspective for further dislocations in the market should they occur. We have upsized our revolver. We've significantly increased our liquidity position. As I'm talking to you…

Great. Thank you, David. Dalam, let's just dive right into Q&A.

Thank you, sir. [Operator Instructions] I show our first question comes from Olivia Tong from Bank of America. Please go ahead.

Hi, thank you. Good morning. I guess, let's start with a couple of questions around sales as they obviously accelerated pretty dramatically this quarter. So can you just talk about the changes? How much was there? Any potential catch up pull-forward? And then importantly just the longer term implications versus those that are more transitory? Just how the organization is balancing the near-term objective given the challenges in the current environment versus potentially maybe to re-jigger expectations here a bit given what could potentially be longer lasting structural changes to demand in some of these categories? Just trying to understand how you're thinking about how the business changes once we get past this sort of quarantine phase due to the supply chain and other areas as you think about weathering the demand volatility? Thank you.

There's a whole lot in there, so I'm going to have to hand this over to Randy to build on it. But I would tell you that listen we feel really great about as I said in the opening remarks our fourth quarter all of our businesses all four of them are essential, four of our businesses have the name home in them. And it's just -- there's just no way for me to tell you where GDP is going to be in September. There's no way for me to tell you where discretionary income levels are going to be. Frankly, I think our pet business I think is very resilient during any sort of economic downturn. And in fact we're going to continue to invest there and build. I would tell you that Home & Garden -- and while this quarter was flattish and we've had some supply chain issues there I think Home & Garden is an extremely resilient business. And just like it took us a little while to get pet turned around we're making real strategic investments in Home & Garden with R&D with innovation with new pipelines. And so don't think we're going to take our foot off the gas anytime soon on Home & Garden. Quite frankly with the pet division actually chipping in and helping produce hand sanitizer you may see more Cutter advertisements this spring, this summer than you've ever seen. So we're going to continue to pick our spots and be aggressive through this. Clearly, if everyone stays in their home, shelters in place and the economic activity is very bleak that hurts our more cyclical businesses. So in HHI would suffer. Appliances we've had supply chain disruptions. We're fixing that now. But even there we're more of a value price point. Not cheap, but great product at a great price. So we'll see. But again, I think your main takeaway from me, before I turn it over to Randy is look I'm actually thrilled. We – again, we are now seeing the results of a lot of hard work a lot of investment over the last 24 months. And while I really thought this was just going to be a blow it out of the water year and we were going to have an amazing stock price and all the rest of that and you can see I personally bought shares at $60 not too long ago didn't foresee a pandemic in my forecast. But our fundamental earnings power is very much intact and we're still steering the ship towards $7 a share in free cash. And I just can't give you the timing of that but we'll get there. So Randy you want to build on that give more color?

So, good morning Olivia. Just back to your original question as far as how we were thinking of the impact in the quarter and whether or not there was COVID positivity that was the result or was the driver of the Q2 results. And again, as Jeremy said, when we look across the businesses we think that the COVID situation was actually a net drag on revenue for the quarter. We had three of the four businesses that actually had a negative. Our pet business we believe did see a slight benefit a couple of million dollars maybe in the quarter on revenue. But for the most part it was across the board a negative to us. With regards to all the forward-looking questions that you asked we're going to try and be as disciplined as we can be to not go there simply because it's uncertain. And maybe I can talk a little bit about the process that we're employing. So we've divided this situation into the immediate the intermediate and the longer-term. And we've ensured that we have collective groups that are managing across all businesses and they're discrete and independent and led by separate teams so that we don't get tunnel vision within the current environment and not pay attention to the long-term. So as an example we're watching POS in all businesses daily, trying to make sure that we're adopting our processes such that we're interjecting new information from the market as quickly as we possibly can to adjust our orders, our inventories, trying to see where consumers are going and just being able to react as fast as we possibly can. We feel good about our ability to make the most of how we go forward. And as David said, we also feel really good about all the changes that we've been making through the GPIP program the cultural changes and believe that we've been able to respond to this crisis in a way we never could have 24 months ago. So I hope that helps.

Super helpful. Maybe can we just build on GPIP? Can you talk about but – can you talk about the flex that perhaps that's provided you before you had implemented these actions both you and David kind of mentioned there's greater than $100 million target. It sounds like you're sticking to that target. But just trying to understand your ability to hit that over the time frame that you talked about, given some of the operation shutdowns, distancing that you need to do government restrictions as you saw. Are there – I mean I have to imagine that there were some projects that you had intended to do this year that maybe need to get pushed out because of the virus whether it's in manufacturing or even if it requires some partnering with retail that just quite frankly right now isn't feasible.

Great question, Olivia. So I would tell you that, it's absolutely the case that there are executional things that are happening where we're having to make adjustments or just being prudent to reduce risk and execution. But I can tell you that those impacts are very minor in the overall scope of the project. And quite frankly in no way of endangering the commitments that we've made publicly because as we've continued to say the last couple of quarters, that $100 million target is the bare minimum that we anticipate delivering.

Thanks so much. Stay well.

Thanks, Olivia.

Thank you. Our next question comes from Faiza Alwy from Deutsche Bank. Go ahead.

Yes, hi. Good morning. So I guess my first question is I know that it's difficult to project and look ahead. But I was wondering if you could share some trends in terms of what's been going on in the various segments as it relates to sales in the month of April?

Yes. I mean listen I don't – again we're going to try to be disciplined about it. I think we've told you we have pretty durable businesses. Everything we do is in and around the home. And there's a reason lawyers want us to remove guidance because of all the different variables. So we don't want to mess that up. But I think what we've said in the prepared remarks is we've actually seen some resilience and some stability in Pet and Home & Garden. And quite frankly I think Randy talked about kitchen products being in demand, haircut kits being in demand and a lot of growth in Remington was disclosed today. I think you'll see us continue to advertise there. We're starting new businesses like hand sanitizer and we do have Microban on our Kwikset door locks and handles. And people are sensitive about germs. There's a lot of ways Spectrum Brands can play offense here. And – but look we're in unprecedented times and we took a very defensive posture. And we'll adjust as things go forward. But I want to be clear. I don't think our earnings power is at all jeopardized. It's just if we go through a pretty deep recession, we would expect demand to be hit. And so that's why we've given you what we've given you. Randy you want to take – do you want to take a stab at it Randy or build on it detract from it?

No. Faiza I think that's what David said is what we're going to stick with. We've – April's been pretty much as we expected internally across our businesses and it's just one month in a long period.

Okay. I guess if I can just ask like where do you see the most amount of certainty – of uncertainty? I think you already said that HHI and HPC segments are more cyclical. But I'm just wondering, is there more uncertainty in terms of the demand dynamics overall, or more in terms of supply or costs? Like is demand the biggest variable going forward?

I think initially we got hit with the supply chain issues out of China. That was kind of January, February. But six weeks in the water puts a little bit of air bubble in there. And so look, quite frankly we have a lot of SKUs that are in exceedingly high demand and we're trying to fill that. And so when you talk about costs yes, you have to look at things like air freight versus the water but it's not material. And then I think we've basically told you that even after the – I would say in the depths of this thing, we've seen continued good results out of Pet and Home & Garden. And we've got a little bit of supply disruption in HHI, we have to solve right now in Mexico and the Philippines. But again, we're very blessed. All our – the majority of our retail partners are open. We have outlets and consumers are shopping.

All right. Thank you.

Thank you. Our next question comes from Bob Labick from CJS Securities. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to stick with supply chain first. You obviously mentioned the constraints on the timing in air versus sea. Could you give us a maybe a rough level of capacity you're running at maybe by segment? And then the other part of the supply chain just to ask, can you remind us how much of your products are coming out of China versus elsewhere? And maybe a longer-term question is, how you're thinking about the supply chain overall? When we come out of this are there any changes you're thinking about making to diversify it further?

Look I think we actually have some competitive advantages versus some of our competitors. We have a pretty global footprint in supply chain in HHI and the vast majority of that is open today. In terms of China, clearly that's a big source of our appliance business. It's the primary source of it. But again, that supply chain is reopened and is robust. And so it's just a matter of getting the product to the retail partner. But I'll let Randy build on this if you like Randy.

Good morning, Bob, the interesting thing that transpired over the course of this pandemic is that early on when the issue was Chinese manufacturers and suppliers, China sourcing was a very bad thing. And consequently just a couple of months later, we're actually in a situation where one of the most reliable sources of supply for materials coming out of the world right now is in China. It's just a matter of swallowing the short period of transportation in between. So yes, we -- I think we've said before that we're -- roughly two-thirds are sourced out of China across all of our businesses combined. But that's the least of my concerns right now, because that's under control. And at least for now, I mean everything can change, but as things continue to look right now that's the most stable portion and we're continuing to solve the other issues as they come along.

Got it. Great. And then just pivoting a little bit. Obviously as you've mentioned, you're very fortunate to be selling essential products at essential retailers mostly, but there's obviously also a large increase in online shopping. And we've talked about for several quarters your online approach. Just wondering, how your capabilities stand today for online purchases and how it's evolving and if that's accelerating as a result of the pandemic?

Hey, Randy, why don't you take it? And why don't you talk about not just comm ops, but the marketing and some of the videos some of the digital? Give them the flavor there.

Yes. So Bob, in that space if you go back, we've made very discrete and strategic investments in what we call omni-channel management across the top of all four of our businesses starting about 18 months ago. And so we've built a team. It's headquartered out of Austin and it's made up of some of the best and brightest minds we can find from the e-commerce retailer space as well as data scientists and others. And the task there was to ensure that we were getting more than our fair share of any transition from brick-and-mortar into the e-commerce, while at the same time ensuring that we weren't putting our brick-and-mortar partners at any sort of disadvantage. And so that team has just performed fantastically. And so whether it be the sales side on the interface side with the customer, whether it be the optimization of search and all of the analog issues that need to be dealt with, but also the creation of video content. And so as we've created this commercial operations team and we've separated out content creation from the marketing approach from the data science approach. And so now we have a very procedural approach to all of our businesses on how to optimize e-commerce. And so we believe that in most of our businesses that transition from brick-and-mortar to e-comm has a net positive impact on our share position.

Okay. Great. Very helpful. Thanks very much.

Thank you. Our next question comes from Ian Zaffino from Oppenheimer. Please go ahead.

Hey, guys. This is Mark on for Ian. Thanks for taking my question. So it's interesting you guys are still active on M&A. So can you guys give a sense of the pipeline going forward? And which lines of business do you guys see the most opportunities? Are there any specific areas that they're targeting? And has your investment philosophy changed at all given the current environment? Thanks.

Look I mean right now we're open for business for M&A. But look I think our shares represented quite frankly, the cheapest allocation of capital we could find. And we've been buying a lot of shares. The pandemic hit us and we thought the prudent thing to do was to temporarily suspend that. But look I think there's a lot of dislocation in the market. And so if we could buy something cheaper than where our own shares trade and it's accretive and it fits with a core portfolio asset we would do that. But I don't -- you shouldn't expect anything large-scale out of us at all. I'm planning to build a very, very large cash position between now and the end of the year so that if we wanted to we could pay off almost a third of our debt at September 30. So, we are generating a lot of cash for the balance of the year. And we'll reassess then. But yes if it's strategic it's small and it's highly, highly accretive to tuck it in we're open. But again I think our stock even where it is today relative to our fundamental earnings power is materially undervalued. We just want to see some stability over the next couple of quarters get the understanding of where aggregate demand is discretionary income and consumption is and be prudent before we make any more material capital allocations.

Okay great. Thank you very much.

Thank you. Our next question comes from William Reuter from BofA Securities. Please go ahead.

Good morning. Just to follow-up a little bit on the manufacturing. Are the facilities in Mexico and the Philippines currently operational or are those shut down? And I guess just with the one facility in St. Louis what percent of capacity are you at there?

Yes. So, look the facility situation is we're operating in the Philippines at reduced staffing levels, but we're operating. It's just -- we had a temporary reduction. And as this we protect our people first. And as we deem it safe we ramp it back up. We have a similar situation in one of the facilities in Mexico. And then one of our facilities in Mexico is currently shut down and we're working and getting it reopened as we speak.

Okay. And then you gave some e-commerce growth rates. Were those direct-to-consumer sales or were those from your customers as they sell to the final customer?

Yes. No, we partner with the dot-coms whether it's walmart.com homedepot.com Amazon that data relates to those.

Great. That's all for me. Thank you

Thank you. And our last question comes from Karru Martinson from Jefferies. Please go ahead.

Good morning. Just when we look at point of sale. How is inventory trending at those essential retailers that are still open? And how has the supply chain for distribution been to get them supply?

I mean I'll let Randy add color, but I mean we're light. I mean we need to get them inventory almost across the board. And so you should definitely takeaway. I mean again we don't know where GDP will be we don't know where discretionary income will be in six months. But we -- our retailers are -- they're looking for a lot more pet products right now. They're looking for a lot of Home & Garden product right now. They're looking for selective much more SKUs in appliances. And because of certain temporary reduction in production in HHI we reduce -- we're reducing our safety inventory there and we've got to replenish. So, I hope that gives you a good feel. But I'll pass the buck to Randy for further color.

Now, Karru I would just say that it varies by region, by product, channel, et cetera. But overall, most of our situations are in a net reduction in retailer inventory versus same period a year ago. So, there was a net de-loading of inventory over the course of the quarter across the enterprise for Spectrum Brands.

Okay. And then in particularly in Home & Garden, do you feel that these are seasonal products that if you don't get the fertilizer sale now -- not fertilizer but the grass seeds and everything else that we won't have that sale coming through? Or was this something that will build as you get those supplies up to normal levels?

So it's important to understand that, we don't participate in the categories of fertilizer or grass seed or potting soil which tend to be earlier season categories. And so our peak demand at retail is in the June and July timeframe. So our Home & Garden business almost always experiences its largest POS week. the first week of July. So we're still in the prebuild side. And our POS numbers on that business continue to be very strong. So we do not believe at this point that we're losing material retail sales because we're still running probably at a 25% to 30% rate of what our seasonal peak POS will be at retail.

Thank you very much guys. Appreciate it.

Thanks.

Thank you. This concludes our Q&A session. At this time I'd like to turn the call back to Mr. David Maura, Executive Chairman and CEO for closing remarks.

Actually I think it's - I said my closing remarks, have I not? Thank you guys for joining us. Really appreciate your time your attendance. We appreciate your support. We wish you nothing but health and safety and get out there and buy some of our new Cutter hand sanitizer. So thanks very much for your attendance and we'll talk to you soon. Look forward to updating you in the future.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.