Spectrum Brands Holdings, Inc. (SPB) Q3 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Spectrum Brands Fiscal Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Faisal Qadir, VP of Strategic Finance and Enterprise Reporting. Please go ahead.

Thank you. Welcome to Spectrum Brands Fiscal Third Quarter 2022 Earnings Conference Call and Webcast. I am Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate today's call. To help you follow our comments, we've 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 2 of the presentation. Our call will be led by David Maura, our Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis, our Chief Operating Officer. After opening remarks, we will conduct a Q&A. 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 August 12, 2022, our most recent SEC filings and Spectrum Brands Holdings' most recent 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 filing, which are both available on our website in the Investor Relations section. I will now turn the call over to David Maura.

Thanks, Faisal. Good morning, everybody, and welcome to our third quarter earnings update. I want to thank all of you for joining us this morning. I'm going to kick today's call off with a discussion on the company's strategic initiatives. Then I'll give an update on the current financial performance and the operating environment we are currently experiencing. Jeremy will then give a more detailed financial update followed by Randy's operational update with more detailed business unit results. If I could start with Slide 6 and our strategic initiatives. We continue to execute on our objective to close on the $4.3 billion sale of our HHI business to ASSA ABLOY. While this deal has taken longer than originally expected, both parties are confident and committed that we will close this transaction, and we are prepared to do what it takes to effectuate this deal. We strongly believe this is a great deal for consumers as it will foster more innovation, quality and value and bring increased competition to the industry. Once completed, we will use the proceeds to completely recapitalize our company, pay down debt and materially strengthen our balance sheet. HHI continues to perform well, and we expect that to continue into the fourth quarter. I'd like to take a moment to thank Tim Goff and our HHI team for maintaining not only their focus and strong operating performance in the industry, but also recently winning new business, all the while dealing with the current sales process. I'm very grateful to this team. Additionally, we have accelerated the integration of our Tristar acquisition into our Home and Personal Care Appliance business, which has been renamed Empower Brands, and recently completed the internal carve-out work necessary to separate this business either through a spin-off or another transaction in fiscal 2023. These actions further our strategic objective of recasting our company into a pure-play global pet and home and garden business. Now turning to the financial performance and our operating environment. Once again, we delivered top line growth this quarter. Our total sales increased 10%, while organic sales, excluding the impact of FX and acquisitions, increased 4.4%. While we entered the third quarter with optimism, having implemented the necessary pricing actions to restore our margin structure and to begin to ramp up our EBITDA generation for a big rebound in our back half, we experienced 2 significant points of pressure during the quarter. The first was many of our retail customers communicated to us that they were experiencing rapidly changing consumer behavior, particularly in home appliances, as well as reduced foot traffic in the home center channels. They also indicated that their inventory positions were as much as 30% to 40% higher than year ago levels and that they were going to curtail replenishment orders, and in some case, cancel orders altogether. The second was we continued to experience challenging weather conditions in our Home & Garden business, which negatively impacted consumer demand and retailer replenishment, particularly in our strong repellent category. These unprecedented negative demand shocks and the unfavorable weather conditions materially reduced our planned sales for the quarter. This sharp reduction in retail orders led to our own inventory levels being higher than expected, which is in turn leading to higher demurrage and detention costs as well as additional storage costs in the short term. So in response, we've taken 2 major actions. First, we moved swiftly to reduce our operating costs by eliminating 17% of our global salaried positions during the quarter, and that will drive over $300 million of annualized savings. While these actions are difficult, it is the right thing to do to position our company for the business conditions ahead. Second, we pivoted our operating strategy to reduce our inventory levels and to run our operations to maximize cash flow instead of reported earnings. This is negatively impacting our margins and contributed to the shortfall to our original earnings outlook. In addition, we are investing in targeted advertising and promotion to help our retail partners reduce their own current inventory levels. While these difficult actions negatively impact us in the short term, we are already seeing the benefits. And because of these aggressive steps, we believe we can return to our normal operating rhythms and profitability faster. We are only 6 weeks away from beginning our fiscal 2023, and we want to enter the new fiscal year as lean from an expense and inventory position as possible. Additionally, from an overall pricing perspective, while we continue to monitor inflationary pressures, I would like to confirm that all of our previously planned price increases are now implemented, and we are at our targeted inflation coverage levels coming into the fourth quarter. This is exemplified by our Global Pet Care business where we have seen adjusted EBITDA margins improve sequentially from Q1 to Q3. In our HPC business, we have seen higher sequentially monthly profitability just in the last couple of months with, in fact, the profit for the month of July in this business greater than it was the entire third quarter. Given our third quarter results, shifting consumer demand and the related retail order patterns as well as our near-term focus on reducing inventory, we are updating our 2022 earnings framework. We are now expecting mid-single-digit top line growth over the prior year in the fourth quarter, and we expect fourth quarter EBITDA to be relatively flat to the third quarter and very similar to the prior year period. This would imply a mid-single top line digit -- sorry, this would imply mid-single-digit top line growth with a mid-20s EBITDA decline for the full fiscal year of 2022. Overall inflation remains high. We are seeing some easing in certain areas, including ocean freight and with certain material inputs. While we expect inventory challenges to persist over the next 2 quarters as retailers adjust to shifting consumer sentiment, particularly in HPC, we believe we are particularly well positioned in our Global Pet Care and Home & Garden businesses, which are high-margin, high-velocity consumable businesses that have historically been recession-resilient. Despite the near-term headwinds, our businesses remain competitively positioned, and our operating performance has already materially improved since we implemented the actions just described. We continue to believe that the company has an EBITDA earnings power of over $400 million. While the exact mix of business unit contribution is difficult to predict, we believe that Global Pet Care has the ability to generate greater than $200 million of EBITDA per year, Home & Garden can generate greater than $120 million of EBITDA per year, and our Empowered Brands has the ability to generate at least $100 million per year. If I could now turn your attention to Slide 7. Our capital allocation priorities remain consistent, but our short-term focus has adjusted to cash flow generation. In short, we are looking forward to closing the pending HHI divestiture, recapitalizing our company, deleveraging our balance sheet and moving to a transaction to separate our Home & Personal Care business. We are confident that the public markets are looking to invest and to allocate capital to a more pure-play global pet care and home and garden company, and these actions should result in a re-rating of the valuation of our publicly traded shares. Before I turn the call over to Jeremy, I would like to thank our teams who have worked tirelessly in the face of current market headwinds and have helped make some difficult short-term decisions to prepare our business for long-term success. Now you'll hear more from Jeremy on the financials. Jeremy, I turn the call over to you.

Thanks, David. Good morning, everyone. Just one quick clarifying comment. Our headcount reduction mission will result in annual savings of over $30 million. If you could turn your attention to Slide 9, a review of Q3 results from continuing operations, beginning with net sales. Net sales increased 10%. Excluding the impact of $29.5 million of unfavorable foreign exchange and acquisition sales of $71.3 million, organic net sales increased 4.4% from pricing actions related to inflationary costs and improved fulfillment despite reduced consumer POS, higher retail inventory levels and replenishment order headwinds. Gross profit increased $13.4 million, and gross margin of 33.7% declined 160 basis points from a year ago as price now exceeds inflation dollars but does not cover the margin percent, as well as increased demurrage and detention costs from higher in-house inventory and inventory back up in the supply chain. SG&A expense of $256 million increased 13.9% at 31.3% of net sales with the dollar increase driven by higher transportation costs, higher distribution expense due to short-term storage costs from high inventory, expanded distribution footprint and higher investment in restructuring, optimization and strategic transaction initiatives. The operating income was $38.7 million, was driven by a onetime $25 million reduction in contingent consideration associated with the Tristar business acquisition, offset by the higher SG&A I mentioned. The increase in GAAP net income and diluted earnings per share were primarily driven by the increase in operating income. Adjusted diluted EPS declined to $0.54 driven by unfavorable foreign exchange impact and higher SG&A. Adjusted EBITDA was $80.1 million, declining due to unfavorable foreign exchange impact and higher costs related to supply chain challenges and higher inventory levels. Turning to Slide 10. Q3 interest expense from continuing operations of $26 million increased $5.6 million due to both higher borrowings on the revolver from funding the Tristar acquisition and increased working capital needs and a higher interest rate on our variable rate debt. Cash taxes during the quarter of $6.4 million were $700,000 lower than last year. Depreciation and amortization from continuing operations of $25.4 million was $4.8 million lower than the prior year. Separately, share and incentive-based compensation decreased $8.4 million. Cash payments towards restructuring, optimization and strategic transaction costs were $29.8 million versus $21 million last year. Moving over to the balance sheet. The company had a quarter-end cash balance of $248 million and $307 million available on its $1.1 billion cash flow revolver. Total debt outstanding was approximately $3.3 billion, consisting of $2 billion of senior unsecured notes, $1.2 billion of term loans and revolver draws and $95 million of finance leases and other obligations. Additionally, pro forma net leverage was 5.4x compared to 5.2x at the end of the previous quarter as the trailing 12-month EBITDA declined. Capital expenditures were $20.9 million in Q3 versus $9.7 million last year, mainly due to higher investments in our SAP implementation. Turning to Slides 11 and 12 on our expectations for 2022. As David mentioned, we're updating our 2022 earnings framework. We now expect mid-single-digit top line growth with mid-20s EBITDA decline for the full year of fiscal '22. We expect $290 million to $310 million of total inflation during the year and intend to offset the inflation through pricing and cost management actions. Depreciation and amortization is expected to be between $115 million and $125 million, including stock-based compensation of approximately $15 million to $20 million. Full year interest expense is expected to be between $95 million and $105 million, including approximately $7 million in noncash items. Restructuring, optimization and strategic transaction cost-related cash spending is now expected to be between $85 million and $90 million. Capital expenditures are expected to range between $65 million and $70 million. After filing our fiscal year '21 tax returns, we had approximately $770 million of usable federal NOLs coming into fiscal '22 and expect to use substantially all of them to offset a portion of the gain on the sale of HHI. Cash taxes are expected to be between $30 million and $40 million. For adjusted EPS, we're using a tax rate of 25%, including state taxes. Regarding our capital allocation strategy, after the closure of the HHI sale, we intend to significantly reduce our debt levels. After full deployment of the HHI proceeds, we're targeting 2 to 2.5x net leverage for our long-term target. Now to Randy for a more detailed look at our operations and business unit results.

Thanks, Jeremy. Thank you all for joining us this morning. I will be reviewing our third quarter operations results by business unit. I'll start with Home & Personal Care, which is Slide 14. Reported net sales increased 20%, and organic sales increased 2.5%. Organic net sales increased from continued momentum in the garment care and growth in personal care, which more than offset the decline in kitchen appliances. The third quarter represented the 12th consecutive quarter of year-over-year top line growth for this business. As mentioned earlier, sales in the U.S. were impacted by high retail inventories as customer ordering remained lower than consumer POS. However, garment care in the U.S. still posted growth as we continue to build on our #1 market share position in the U.S. Sales in the EMEA region were negatively impacted by unfavorable foreign exchange rates and pressure on consumers from high inflation and the impacts of the war in Ukraine. Excluding the impact of FX, organic sales in the EMEA region increased over the prior year as personal care and garment care appliance sales more than offset the decline in kitchen appliance demand. Our Latin American business also continued to show strength and posted double-digit growth driven by higher consumer demand and expanded distribution. Despite macroeconomic challenges, our products continue to perform well with consumers relative to our competitors. In fact, we had a very strong share gain in our small kitchen appliance and garment care category in the U.S. just during the month of June. We continue to be very excited about our new product pipeline, which now includes great products like the PowerXL Duo NutriSealer. It's an innovative handheld food saver and vacuum sealer with a patented double seal technology. This product has developed a 17% market share in the vacuum sealing category in the U.S. in just the short 5-month period since launch. The product is also generating meaningful subscription sales of high-margin consumable bags used in the sealing process. Additionally, following the successful model of our NutriSealer launch, we are expanding the use of our new content creation studios to leverage this unique capability across our Home & Garden and Global Pet Care businesses as well. These efforts will support our great brands through the rapid creation of digital assets that better tell our story and launch new innovations directly to our consumers. Adjusted EBITDA decreased to $3.6 million for the quarter. The lower adjusted EBITDA margin was driven by the impact of unfavorable foreign exchange rates and higher inventory levels, resulting in increased short-term demurrage and detention costs. This is somewhat offset by cost-reduction measures and cost synergies from the Tristar integration. On a positive note, all of our planned price increases are now in place, and price is more or less offsetting inflation in the quarter. While we see weakened consumer demand due to the inflationary impacts of gasoline, food, housing expense, inventory at retail is likely to be the biggest issue for the category in the next couple of quarters. As such, we took swift action starting in the third quarter to both lower the inventory and reduce fixed costs in this business. We've been moving inventory out and slowing or stopping incoming orders. And we have completed the unfortunate but necessary action of reducing salaried positions by nearly 30% in this business. We have also ramped up the pace of integration in the Tristar acquisition to extract synergies faster given the inventory levels in the retail channels. As David mentioned earlier, we are investing in targeted advertising and promotions to help our retail partners reduce their current inventory levels. We are monitoring customer inventory levels very closely to understand ordering patterns, and we'll continue to ramp these activities over the coming quarters to help drive higher volume. We expect the fourth quarter to improve over the third quarter, which will set up HPC for greater stability and cash generation into fiscal '23. Moving to Global Pet Care, which is Slide 15. The business delivered another strong revenue quarter with reported and organic net sales growth of 12.8% and 17.3%, respectively. Higher net sales were attributable to strong growth in companion animal, offset by softness in aquatics. This quarter represented a record 15th consecutive quarter of revenue growth for the business with strong performance in the Americas and Asia Pacific. Growth in North America was driven by positive pricing adjustments and product availability recovery as fill rates in the U.S. increased each month of the quarter. This was a result of improved operating execution and chews product availability recovering slightly ahead of our anticipated plan. Our Latin American business continues to perform well as our brand and category expansion activities are accelerating growth. Our European sales were adversely impacted by unfavorable foreign exchange rates. Adjusted for those FX rates, European sales were flat to prior year despite pressure on consumers from high inflation and the impact of the war in Ukraine. On the positive side, as we had projected during our last quarterly call, we have completed the implementation of all of our previously planned pricing during the third quarter. At this point, we are covered against current inflationary costs, except the recent unfavorable FX rates and Russia/Ukraine-related cost projections. But we're encouraged by the fact that most costs have currently stabilized in the aggregate. The combination of these 2 factors led to margins steadily improving throughout the quarter, which is a trend that we see continuing into the future. We are planning future price increases in fiscal '23 in the EMEA region to offset recent unfavorable FX and Russian-Ukraine war-related cost pressures. On the side of caution, retail inventories also rose in the quarter in this business as declines in foot traffic and overall spending, especially among the pet specialty channels, is starting to impact the size of retail transactions. These channels have a higher mix of aquatics and small animal categories, which appear to be settling back to prepandemic growth rates. Additionally, while our year-over-year sales continue to show improvement, especially in our chews and treats products, we're beginning to see some signs of softness in the overall category POS. We are cautiously watching the consumers' purchase behaviors given the levels of inflation that all consumers are currently dealing with. That said, we remain encouraged by the category fundamentals, especially given the profile of our business, which is becoming more and more aligned to the consumable products for your pet. The team continues to strategically shape the portfolio in this way as these product types now represent over 80% of our total revenues so far this year. Adjusted EBITDA for GPC declined to $40.9 million for the quarter. With all pricing in place by mid-third quarter, increased freight and input cost inflations were almost completely offset by pricing. We will achieve our full target inflation coverage in the fourth quarter. Lower EBITDA in the quarter was driven by the unfavorable impact of FX, product mix and increased distribution investments as we expanded our DC footprint to support higher revenues, which have grown over 30% over the past 2 years, and continue to support our customer fill rates. While we are carefully monitoring the consumer purchase behaviors and the impact it's having on the replenishment orders in the short run, we continue to be bullish on the categories we compete in and excited about the long-term future of our Global Pet Care business. The operating fundamentals within the business continue to improve as evidenced by our service levels in Q3 reaching their highest rates in the past 2 years. Also, we continue to make steady progress on the inventory recovery of our critical chews category after almost a year of fill rate issues tied to disruption of supply in Asia. We are finally reaching a point where new production capabilities have reached the U.S. in a meaningful quantity, and we will be fully caught up on our service levels in this area by the end of this quarter. We are excited to be ramping up our revenue-generating activities on chews, which had previously been curtailed due to these product availability challenges. This, coupled with our demonstrated ability to drive growth with our category-leading brands and pricing power to recover costs, sets the business up nicely for the foreseeable future. The GPC team remains focused on the execution of our long-term strategy, which is centered around inspiring trust through the delivery of unique and innovative products in order to drive demand for our portfolio of leading brands. Our pet business is a historically recession-resistant business with tremendous upside potential, and I'm confident we will return this business to its prior EBITDA earnings power. And finally, Home & Garden, which is Slide 16. Reported and organic net sales decreased 6.4% and 9%, respectively, in the third quarter. Overall, net sales were helped by price increases put into effect by the end of the second quarter. The organic net sales decline was driven by continued unfavorable weather across the U.S., where drought conditions and high temperatures have impacted much of the country. This weather had an adverse impact on pest control POS, which further reduced retail replenishment orders during the quarter. Within the pest control category, we have seen solid demand for outdoor herbicides and insecticides but significantly weaker demand for repellents, which is a significant driver of our business. Retailers also experienced lower foot traffic in home centers in general, which adversely impacted the POS for cleaning products. Although we continue to pace with the pest control category, overall category POS remains challenged and retailer inventories remain high. This drives further pressure on our sales. Given that most of the selling season is behind us and retailer purchase behaviors remain unpredictable, we are unlikely to recover sales loss thus far in the fiscal year. For cleaning, we do continue to see gains over prior periods. In fact, Rejuvenate POS was up 15% this quarter over the prior quarter in our top 6 accounts combined. Despite the recent POS trends, we actually increased our marketing investment spend over the July 4 holiday and advertised heavily to help push more inventory through our retail partner channels. We are also funding incremental consumer-targeted investments throughout the fourth quarter to support our retail partners and extending the season. Although this will not necessarily result in reorders for replenishment this fiscal year, we expect to help clear out the channel for our fiscal '23 year. The impact of these actions reduced our near-term operating results, but will support the overall long-term performance of the business unit. As for product news, the new Flip & Go delivery system is now available in Bug Stop, bedbug killer and weed and grass killer varieties and is bringing new millennial households into the respective categories, providing a convenient size and one-handed use that allows consumers to more easily treat their bug and weed problems. Our Cutter graphics was recently recognized as a 2022 American design award-winning submission by Graphic Design USA. And Spectracide and Cutter advertising campaigns were recognized by Effie International as 2 of the most effective marketing campaigns of the year. In fact, since 2020, our innovation and advertising focus on brands like Spectracide, Hot Shot and Cutter brought more households into the pest control category than any other comparative brand in those segments. Adjusted EBITDA for the business decreased to $42.8 million driven by volume declines and related fixed cost absorption losses. We also experienced unfavorable product mix from weather and a decline in replenishment orders, which are typically better margin than displays that we shipped earlier in the season. We experienced higher product costs from raw materials, labor and freight, in line with our expectations. And the impact of price increases more than offset the inflation in our third quarter. However, the favorable pricing was not enough to offset the impact of the volume declines. Our pricing actions to date are offsetting inflation. We continue to assess further price increases for fiscal '23 to ensure we maintain our margins in this business going forward. All in all, despite the current year category performance, we remain confident in our strategy and we'll continue to drive innovative consumer solutions. The fundamentals of our Home & Garden business remain robust as our innovative products driven by consumer insights and our strong brands continue to excite our customers and end consumers alike. The category has held up well, considering that 2/3 of the continental U.S. is currently in drought conditions. As we look forward to fiscal '23, we are pleased that we are capturing meaningful distribution gains for next year. And our retail customers tell us they are still focused on both cleaning and pest control for the coming years as these consumable categories become more relevant to repeat high-velocity purchases versus categories such as lightbulbs. We've seen a high retention rate of the new consumers that came in during COVID and believe they will continue to purchase into the future. We feel confident that the category remains strong long term, and our Home & Garden business is very well positioned for success within the category in the future years. This segment has been recession-resistant in the past as outdoor living and gardening both typically do well in tough economic times. During the last recession, we actually saw an increase in the number of new consumers coming into the category during the financial crisis. Similar to our Global Pet Care business, we expect to return this business to its prior EBITDA earnings power soon. In my section, I want to thank all of our global employees for their strong efforts during these challenging economic times and for staying committed to our long-term strategic initiatives. Now back to David.

Thanks, Randy. Thanks, Jeremy, and I want to thank everybody for joining us on the call today. Given that we've covered quite a bit of material, let's conclude with our key takeaways. If I could ask you to join me on Slide 18. First, we continue to make progress on the strategic objective of creating a higher-margin, faster-growing, pure-play global pet care and home and garden business by continuing to execute on our objective to close the $4.3 billion sale of our HHI business to ASSA ABLOY; and secondly, by accelerating the integration of Tristar into our Home and Personal Care Appliance businesses and completing the internal carve-out work necessary to separate that business through a spin-off or another transaction in fiscal '23. Secondly, given the challenging retail environment with multiple key customers actively reducing inventory levels, leading to unpredictable customer ordering and the overall uncertain macroeconomic conditions, we're lowering our 2022 earnings framework as we focus the business on cash generation even at the expense of our near-term EBITDA performance. While lowering the short-term earnings framework, we believe we are well positioned to succeed long term because of the strength of our brands, the success of our investments in consumer-related innovations and our increased focus on consumable products. Third, despite the short-term headwinds, our businesses are fundamentally strong and solid, and we continue to take steps to prepare our business for long-term success. We have taken meaningful steps towards improving our fixed costs and reducing our global salaried positions by 17%, and we're focusing on liquidating inventory in the short term to position our business for long-term performance. We have also accelerated the Tristar business integration to extract synergies faster. We firmly believe that the earnings power of these continuing over $400 million in EBITDA as the environment stabilizes. I want to close by reiterating our commitment to manage the business for long-term success. I'd like to thank our employees who continue to work very hard to navigate our company through these unprecedented times. I want you to know the future of Spectrum Brands remains bright as we continue to make living better at home. And I'll now back -- turn it back to Faisal for questions.

Thank you, David. Elizabeth, we can go to the question queue now.

[Operator Instructions]. Our first question comes from the line of Peter Grom with UBS.

I guess I wanted to ask about the return to $400 million EBITDA and maybe specifically around these long-term targets you provided for each of the segments. So I think, Randy, you mentioned that you expect to return to normalized levels in Global Pet Care and Home & Garden soon. Can you maybe elaborate on maybe what soon means? Are you trying to imply that there is that $200 million for GPC and $120 million for H&G are achievable in fiscal '23 and getting back to $400 million is really going to hedge on HPC, which seems more challenge? Or are you kind of saying that this is kind of a multiyear recovery as we think about the appropriate earnings power for fiscal '23?

Peter, it's Dave. Let me take it, frame it, and then the guys can fill it in. Look, the reality is Q3, we had a negative demand shock. And we pivoted the operating strategy of the company. We've taken out $30 million of costs vis-à-vis headcount reductions, very painful but necessary. And we're really lowering aggressively the inventory levels. I'm trying to get the company basically battle-ready for recession. Q4 is -- I mean, just to give you some visibility, right? And that's why we put the call as late as we did on the calendar because I wanted to have the July numbers in front of me and be able to give you guys some comfort as investors. July -- Q3, you see reported EBITDA down 20%. July for the remaining was essentially flat. And quite frankly, we are already run rating back to $200 million in EBITDA in pet, as I talked to you this fourth quarter. In fact, the fourth quarter is likely to be the best quarter of our fiscal year for fiscal 2022. And the goal is basically to get back on track in fiscal '23. I hope that helps you out, and the guys can fill in.

Yes. I'd just add, Peter. I mean, obviously, it's a little early to be giving guidance for '23, and the economic conditions are moving all over the place week-to-week and month-to-month. So I think we've got to watch that closely. We'll know more in 90 days, and we'll report the fourth quarter, and we'll try to give you an even more clear picture for F '23 then.

Okay. That's helpful. And then, David, I just wanted to ask about HHI. You mentioned the business is performing well. You won new business or distribution, I think you mentioned. Can you maybe help us understand or provide some numbers around that? I think we're all hoping that this deal closes. But I think we're also trying to figure out how much EBITDA would really come back to the business if this transaction were not to close.

Well, the transactions are going to close. HHI is performing well and actually better than its competition in the industry. There's no question like all businesses, they've had to absorb a lot of inflation, and that's hurt their short-term performance like all the rest of us, but they're getting their pricing in. Look, I would tell you that business in recessionary times is probably a $240 million, $250 million EBITDA business. And when everything is running right and pricing is good, it's a $300 million EBITDA business. And they are slated to produce, let's call it, high $50 million, $60 million EBITDA this fourth quarter. It's a good business. We're going to close the deal.

Our next question comes from the line of Ian Zaffino with Oppenheimer.

Just wanted to kind of key in on the comments on pet POS softness. Can you tell us maybe what's driving that? Is that purely economic? What areas are you seeing in the high and low end? And then also, is it maybe more of just a kind of post-COVID softness that you're seeing just across pet in general?

Yes. Ian, this is Randy. I think it's really important to understand that across our businesses, we're comping some really unusual previous year numbers with regards to POS, especially in areas like environments and equipment where a lot of folks were out and adding to their pet families over the course of COVID lockdowns. And so a lot of our POS softness is in those areas of hardgoods, aquatic environments where we don't see as many people adding new pets into their families. But at the same time, most of our portfolio is focused on the consumables as well as the profitability of the business focused on the consumables. And so we're seeing good, solid POS in the areas like dog chews and treats. And as I mentioned in my prepared remarks, we've kind of idled that engine as far as consumer engagement and really trying to drive that business for the last year as we've been facing these supply issues out of Asia. And so we're really excited about the fact that we're now back and able to drive that business more aggressively. Hope that helps.

Ian, to give you more color, right, I mean, that business is -- mainly this year have been hit because of Europe. I mean we lost a lot of business in the Ukraine-Russian war. FX has just gone the wrong way. We have a reasonable-sized European business. And then in the North American market, we've seen very, very good improvement. But in those markets, the higher-dollar fish tanks, which are lower margin but the mix and -- those sales are just down. People just -- you can definitely see the consumer being impacted by gas prices, food, rent. And they're just -- they're not as willing to part with $300 billion -- $300 fish tanks. They don't want to part with that money to go buy durable. So that's the part of the business that's really getting hit. But earlier in the year, we had real supply chain constraints, and those are being fixed. And so the fill rates are up. Chews and treats is really the exciting part. And again, I can confirm to you already that business' EBITDA run rate is almost back to $50 million a quarter, and that's a $200 million EBITDA business. So we're fixing it fast, but we've taken a lot of pain during the year there in pet.

Okay. Great. And then on the HPC spin, as you're going through the due diligence, any sort of surprises there? Anything you feel like you need to do? Like does it have the scale necessary to maybe spin it off? Do you need to buy something there? Any other type of efficiencies you could kind of extract that you're thinking about right now?

Yes. We're definitely not buying anything else there, period. We just added a couple of hundred million bucks of revenue with Tristar. We're getting that integrated. I suspect we'll see a much better earnings profile out of that business already here in Q4. Let's talk to you in -- when the earnings come out. But I want to get the earnings there going in the right direction. The comps get easier. And then I'm spinning out something that is really -- can stand on its own. Just don't want to rule out any sort of M&A because there are other partners -- there are other competitors in the space that I think would benefit from merging with us. And if we can merge with them, take some cash off the table and ride some upside there. I just don't want to rule that out. But we -- the carve-out work is effectively done. This quarter, I want to again thank the team for completing that. It was called Project Tiger internally. That business is officially ready to transact. And spin-off is the one action that is within our complete control and probably the default path for standing that up on its own.

Our next question comes from the line of Bob Labick with CJS Securities.

You've given a lot of great color, obviously, on the inflation impacts and the inventory headwinds. I just wanted to kind of dig further into, aside from those issues, what you're working on kind of behind the scenes. I think you mentioned to an investment in product launches and the innovation launches of HPC. And Randy mentioned some shelf space schemes out of Home & Garden. Maybe just give us a sense of what's going on kind of behind the scenes aside from the big headlines of inflation and inventory to grow next year and to continue down that path.

Yes. I mean, Bob, despite these kind of challenges and things that happen outside our 4 walls, I mean, we are constantly working on in all of our businesses, at least a 3-year product pipeline and giving early -- as early visibility as we can to our retail partners to let them help drive the direction we go in R&D. So we remain very positive on the new product launches. Randy covered a few of them in his prepared remarks. But overall, they continue to gain traction in retail and with consumers.

Yes. Bob, I think one of the most exciting things about the Tristar acquisition is the model change that they bring as an opportunity to blend with our more traditional operating model. And I think David and the entire team is very happy with what we're seeing and how fast we're able to integrate there. I talked on my prepared remarks about the NutriSealer, and it's just a great product launched incredibly fast by our standards. And it's unbelievable that we're able to capture such a substantial market share, and that helps us really drive attention from consumers and also retail partners. But the other thing I mentioned that I don't want to lose sight of is we're not just keeping that new capability within the home and personal care space, but we're expanding it out into the global pet care environment as well as the home and garden environment. Both of those teams have been in New Jersey in those studios, creating and working on new content to better tell the stories of the innovation that's coming in those spaces. And so I don't want to go into all the details on Home & Garden as far as new products next year, but we've got a number of great things launching next year and really still excited about the launch for the following year as well.

Our next question comes from the line of Chris Carey with Wells Fargo.

I'm trying to understand the confidence around some fiscal '23 snapback. I know you're not giving guidance this morning. But is that based on what you're seeing quarter-to-date and that gives you confidence on next year? Is that based on you're seeing the inventory reductions, and maybe that gives you some confidence on replenishment orders? Perhaps demand is more resilient than you thought. I'd just maybe love a bit more context on this concept of snapback for underlying because I think that's obviously an important concept anchoring the stock.

Well, look, let's just look back over the past couple of years. I mean Global Pet Care is -- has already achieved $213 million in EBITDA in its past. It is -- I mean, right now, if you want to look at some of the detailed economic forecasts, cosmetics, food and pet is kind of where you want to be in terms of where consumer dollars are going to flow. Home & Garden is $123 million EBITDA business in the past and does very well in recessions. In fact, it grew during the last recession. Look, you have an unprecedented situation going on here. We've moved from a pandemic, the factories being closed, the supply chain shocks to inflation that the country hasn't seen in -- since the '70s. And then all of a sudden, this rubber band that is this elongated supply chain, and nobody can get inventory. And the retailers who are the most sophisticated forecasters in the world come out in May and June and say, "Hey, guys, I got 30% to 50% more inventory than I had a year ago." You're hitting an unprecedented demand shock. And so there is no question that we have probably taken actions that are more Draconian than our competitors. But my view of the world is, I want to take my medicine fast because I want to get healthy faster. And I'm sitting in a room, I'm only 6 weeks away from ending the fourth quarter. The reason I scheduled the call to be so late this quarter is I wanted to give you guys, as fellow investors, a view, and that view is July was basically flat from an EBITDA production standpoint in our RemainCo businesses. That is one hell of an improvement from the reported numbers we just gave you this morning. And I'm telling you that Home & Garden is run rating north of $100 million seasonally adjusted, and pet is run rating back to $200 million as we sit in this room. Look, we still have to get through several quarters of clearing inventory. I still don't know where consumer demand is going to be in 6 months. There is still uncertainty. We still have to put together an annual operating plan and go to our Board of Directors for '23. But we're trying to be as transparent, open and honest and our businesses are strong, our end markets are strong. Look, we're winning a lot of distribution in Home & Garden for next year. But we've got to advertise right now, which is going to hurt our EBITDA, but it's going to help our consumer -- our retail customers clear their inventory. That's not going to give us replenishment orders this year, but it's going to clean those channels for fiscal '23, and that's the right thing to do for the business. Does that help you?

Yes. That's very helpful. One quick follow-up. I guess I'm also trying to understand a little bit how much of this year and what's going on in general is a function of you're seeing this change in the demand environment from consumers and retailers. And you're taking aggressive actions to work down inventories, perhaps chase less sales than you otherwise would have done versus everything coming at you from the retailer standpoint is probably not a way to quantify that. But I wonder if you can frame that because I think what you're trying to lay out is you're establishing a much cleaner level of inventory going into next year so you're ready to go on fiscal '23. And I'm just trying to understand a little bit this year, how much is maybe what's coming at you from the retailer side versus what you're doing proactively to clear the decks a little bit. Again, I realize quantitatively is probably not a way to say that, but just framing that.

Look, I'll take a stab at that. I don't want to mislead anyone in any way. There is going to be inventory hangover going into fiscal '23. Fiscal '23 starts in 6 weeks for this company. There is no way I can clear the decks that fast. What I'm trying to communicate is I've got all the operating units reporting back to me on deals we can cut to move inventory that are at a significant degradation to EBITDA margins. I just -- my personal belief is inventory typically doesn't age very well, and you want to move it out. But there's going to still be some of this lingering pain as we go through kind of Q1, Q2 of '23. I just think it's much more manageable. I think -- I personally think retailers can use Christmas as kind of clear the decks, very promotional super aggressive discounting time to clear their own channels. Randy, Jeremy?

Yes. That's right, David. And obviously, Chris, we're sitting here with a continuing operations inventory level, you can see on the balance sheet, it's about $250 million higher than it was at the end of the last fiscal year. That's not how we planned the year. So you're right, there's still some challenges there. It probably is the smaller impact as compared to volume to what I would view as where we thought we would be 90 days ago for the quarter and for the year, but it does have an impact on margins, to David's point. And it will continue to have an impact, particularly in HPC, over the coming couple of quarters.

Yes. Chris, another thing to point out, we talked about in the prepared remarks is that because of the inventory, there's actually a double hit that some material charges and costs associated with storage, detention, demurrage. So that puts a double pain on that inventory that will come off at some point in '23.

Our next question comes from the line of Olivia Tong with Raymond James.

First, I just want to follow up on Chris' question line. If demand sort of stays stable where it is right now, how long do you think it will take for you to clear the inventory, realizing, of course, that mid-August is -- it's probably not going to happen in the next 1.5 months? But is it first half of the year, full year, if demand stays sort of where it is right now?

Yes. We don't have perfect visibility to channel inventory globally, Olivia. But I think David's right in pointing to the holiday season, particularly in HPC, being a very important one. I think it will be important for pet, too. It typically is pretty strong seasonally. But we're also monitoring other things. I mean Europe is in a difficult place right now. Demand is tough. There's a drought, the war, a lot of inflation. Currency is hurting a lot of businesses there that are bringing in product from Asia. And so I think it's really difficult to say. I think it will be at least a couple of quarters. But beyond that, to David's point, we can't predict consumer demand 6 months out.

Got it. And then just broadly, I wanted to talk a little bit about HHI and what gives you the confidence that, that deal will close. Because clearly, the impact of it and the follow-on actions could be transformational, but the deal time line has obviously been extended. So to the extent that you can provide any incrementality in detail to help us out, knowing -- realizing, of course, that there's only so much you can say about it, but would love to hear your take.

Listen, the U.S. regulator continues to review the proposed acquisition. We're continuing to work with them to resolve any potential concerns that's actively happening. But I think the biggest thing you should take away is that, look, you've got 2 parties here, Spectrum Brands and ASSA ABLOY, that are absolutely committed and confident to close this deal. And we're willing to do a lot to get it done. And I'm telling you that a true analysis of the business and what it will do to the U.S. consumer, it is absolutely in the U.S. consumers' best interest. ASSA will invest heavily in bringing innovation, quality and value to the consumer and more competition to the space. And that is what I believe a U.S. regulator or anybody else would want to see happen here. So that's the confidence level.

Got it. And then just lastly, a point of clarification in terms of the salaried positions that you exited. Can you talk about where they are, if there's a particular skew in terms of IT, marketing, whatever, overhead, et cetera? Just a little clarity -- or whether it's just across the board.

Look, real quick, we took out probably twice as many on a percentage headcount basis out of HPC as we did the rest of the organization. But again, I want the business to be kind of battle-ready. And we want to be as lean from an expense -- operating expense standpoint and an inventory standpoint as we go into fiscal '23, but it's going to reduce our annual cost by $30 million -- by more than $30 million in fiscal '23. Randy, Jeremy?

No. I think that covers it, yes.

Yes.

Our last question comes from the line of William Reuter with Bank of America.

It sounds like when you talk about the trade-off between near-term profitability and clearing inventory, there were certainly some promotional dollars that have been spent and markdowns. Is there any way to contextualize how much better EBITDA would have been in the third quarter? Or maybe what -- how much better it would be in the fourth quarter if you were not taking these kind of onetime-ish pains?

We can't really quantify that, Bill. What I'll say, again, is that volume was certainly the biggest driver in where we ended up from an EBITDA perspective. FX and the need to promote discount, et cetera, were probably also kind of equal drivers of degradation in the quarter. FX is bigger than you probably expect when you think about our EMEA, HPC and GPC businesses that are essentially buying in dollars through China, the RMB and selling in pounds and euros. And so both translation and transaction had a pretty big impact as the dollar went to essential parity with the euro.

Got it. And then just one follow-up. With EBITDA now being a little bit lower than what we would have expected 3 or 6 months ago, you've maintained the pro forma leverage target for the transaction. Does that mean that you would plan on paying down more dollars of debt than previously you expected?

I think that's unlikely, Bill. I think where we're sitting here today, we view this as a short-term situation. Certainly, if we went into longer-term economic recession, we could revisit that decision. But as we sit here today, I think we keep our plan relatively intact.

I'd add to that, I'm planning for my EBITDA to start to increase as I go into '23, and that will be the bigger part of that ratio.

All right. So thank you all. With that, we have reached the top of the hour, so we will conclude our conference call. Thank you to David, Jeremy and Randy. And on behalf of Spectrum Brands, thank you all for your participation.

This concludes today's conference call. Thank you for participating. You may now disconnect.