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Good day, and thank you for standing by. Welcome to the Spectrum Brands Holdings, Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there'll be a question-and-answer session. [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. Please go ahead.

Thank you. Good morning, and welcome to Spectrum Brands Holdings Q2 2023 earnings conference call and webcast. I’m Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting, and I will moderate 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. The 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; and Jeremy Smeltser, Chief Financial Officer. After opening remarks, we will conduct the Q&A. Turning to Slide 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 May 12, 2023, 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 that 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 sections. Now, I'll turn the call over to David Maura. Over to you, David.

Thank you, Faisal. Good morning, everyone. Thank you for joining us today for our second quarter earnings update. We appreciate everyone attending. I'll begin with an update of the company's strategic initiatives, followed by an overview of the operating environment. Jeremy, as usual, will then provide a more detailed financial and operational update, including a discussion of the specific business unit results. If I could get everyone to move to Slide 6, let me first start with a very positive achievement on the strategic front. As many of know and you've already learned from our press release last week, we've agreed to a stipulation with the Department of Justice to settle their challenge of Assa Abloy’s $4.3 billion acquisition of our Hardware and Home Improvement segment. We remain confident that the transaction will close on or before June 30, 2023. We are particularly pleased that our hardware asset and employees are going to such a great home in Assa Abloy. I have not only the utmost respect for them as a company, but their culture is excellent. They are a high-performance business with impeccable character. I am confident that our employees and brands will flourish in Assa's hands as they take HHI to the next level operationally. This is the most significant strategic pivot likely in the history of Spectrum Brands, as the receipt of the HHI sale proceeds will materially strengthen our balance sheet, enhance our capital allocation strategy, and in fact, will make us a net debt-free company. This transaction will also bring us closer to our long-term goal of becoming a faster growing, higher margin, pure play Global Pet Care and Home & Garden company. This will also allow the team to devote all of our resources to, and to prioritize the long-term growth of the remaining businesses. We remain committed to finding a strategic and organic way to enhance the value of our Home & Personal Care business. As we have previously communicated, we will use the proceeds from this transaction to delever and to strengthen our balance sheet. We will start that process by paying off the term loan and the revolver facility immediately following the close of the HHI sale. We also plan to return cash to our shareholders through share repurchases. Our long-term leverage target remains to be between 2x to 2.5x on a net levered basis. Now, let's move to our operating environment and the financial results. I'd like to focus on two key messages today. First, our renewed focus on profitability, working capital management, and cost management, continues to pay off despite a difficult and unpredictable market dynamic and the macroeconomic headwinds we and our peers have been facing. While these headwinds are challenging to manage, we remain confident in our long-term strategy and our ability to deliver value to our customers. And secondly, we continue to face short-term headwinds related to consumer inventory actions, particularly in our Home & Garden business that are more severe than we expected, and that will impact our fiscal ‘23 results more than we previously anticipated. Building on the first message, our focus on cash generation continues to pay off. We reduced inventory by another $170 million in the quarter, including our HHI business, following a reduction of $170 million in the preceding six months. That means, since turning our attention to running our business for cash and prioritizing cash flow and inventory reduction over earnings, we have now reduced our inventory by over $340 million U.S., including HHI during the last nine months. We continue to focus our operating priorities to maximize cash over earnings and reduce our overall inventory levels. The strategy is clearly working, as this effort has resulted in positive free cash flow so far in the current fiscal year, but we will continue to focus on working capital management and strengthening our balance sheet. Our inventory is now approaching appropriate levels to support the demand in the marketplace, and further reductions will come from rebalancing our inventory profile to minimize excess inventory. On the cost side, we remain focused on simplifying our business model and reducing cost to operate as a leaner organization, with a renewed financial discipline. To that end, we have made further fixed cost reductions and have eliminated additional headcount in certain focused areas of the organization. With all the cost actions in place, we believe we are well positioned to face the short-term headwinds, while still maintaining key capabilities necessary to continue to invest in the long-term growth of the businesses. Now, building on my second message regarding these short-term headwinds, as expected, the consumer demand environment remained challenging compared to the strong COVID-related demand growth over a year ago, especially for the hard goods categories, where demand is continuing to normalize to pre-pandemic levels. And our retail partners remain focused on inventory reductions in those categories. Additionally, our key retail partners in our Home & Garden business changed their strategy to reduce inventory in the quarter compared to a strong prior year pre-build ahead of the season. While our Global Pet Care and Home & Personal Care businesses performed in line or better than expectations, we were disappointed with the results in our Home & Garden business for this quarter, which were also impacted by adverse weather conditions in key markets late in the quarter. Our financial results obviously reflect these conditions, as our total sales declined 9.7%, while organic sales declined 10.1%. And Jeremy will provide more details by business unit in his comments. While this volume decrease was the main contributor of the EBITDA decline in the quarter, EBITDA was also pressured by unfavorable FX year-over-year, as well as the impact of selling down our higher cost inventory accumulated during the prior year periods. As a reminder, we started this fiscal year with approximately $55 million in excess capitalized variances on our opening balance sheet, and we expected to roll through our income statement in the first half of fiscal ‘23. We have now substantially sold all of that inventory, and we are exceeding currently the expected profitability inflection point in our recent monthly results. If I can move your attention now to Slide 7 and our high-level fiscal ‘23 earnings framework. We remain very pleased with the performance of our Global Pet Care business, and we continue to see improvements in our Home & Personal Care business despite the anticipated headwinds in its end markets. We also remain very confident in the long-term strategy for our Home & Garden business, but with the change in retailer inventory strategy that we experienced in the just completed quarter, we expect sales in that business to be well below the POS levels in the fiscal year, and therefore, below our previous expectations. With the additional sales pressure, we now expect the H&G business will not reach its full earnings potential during this fiscal year, and will fall short of our previous EBITDA expectation for that business. Based on this additional revenue pressure, we need to update our earnings framework. We now expect the topline for the year to decline by mid-single digits to last year. As a consequence of this sales decline, we expect our adjusted EBITDA to be down in the low mid-single digits. Before I turn the call over to Jeremy, I would like to thank our teams around the world who've worked tirelessly throughout a period of uncertainty related to the almost two-year pending HHI transaction, and while facing all the while the current market headwinds and making some very difficult short-term decisions to prepare our business for long-term success. Now, you'll hear more from Jeremy on the financials and our additional business unit results, and then we'll join you in the Q&A. so, I'll turn the call over to you, Jeremy.

Thanks, David. Let's turn to Slide 9 for a review of Q2 results from continuing operations. Net sales decreased 9.7%. Excluding the impact of $19.4 million of unfavorable foreign exchange and acquisition sales of $22.1 million, organic net sales decreased 10.1% from reduced customer replenishment orders as they maintained focus on inventory reduction, particularly in Home & Garden and kitchen appliances product categories, and from lower consumer demand for hard goods and consumer durables categories compared to last year. Gross profit decreased $41.1 million, and gross margin of 29.4% declined 220 basis points from a year ago from the reduction in volume and from sales of higher cost inventory accumulated during the prior year, partially offset by positive pricing. Operating expenses of $291.5 million increased 10.5% at 40% of net sales, with the dollar increase driven by the recognition of intangible asset impairments on our Rejuvenate and PowerXL brands of $67 million combined, offset by the positive impact of fixed cost reduction efforts initiated in the prior year, and that continued in the second quarter, along with overall spend management. The operating loss of $77 million was driven by the impact of the sale declined, and the intangible asset impairment charge I mentioned. The GAAP net loss and decrease in diluted earnings per share were primarily driven by the increase in operating loss and higher interest expense. Adjusted EBITDA was $51 million, declining due to the decrease in volume and unfavorable foreign exchange impact, offset by favorable price and fixed cost reductions. Adjusted diluted EPS declined to a loss of $0.14 per share, driven by lower adjusted EBITDA and higher interest expense. Turning to Slide 10, Q2 interest expense from continuing operations of $31.6 million, increased $6.9 million due to a higher interest rate on our variable rate debt. Cash taxes during the quarter of $5.7 million were $6.7 million lower than last year. Depreciation and amortization from continuing operations of $22.4 million was $3.3 million lower than the prior year. Separately, share and incentive-based compensation decreased $2.1 million. Capital expenditures were $15.9 million in Q2 versus $10.2 million last year. Cash payments towards strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments, were $22.5 million versus $28.7 million last year. Moving to the balance sheet, the company had a quarter-end cash balance of $328 million, and $362 million available on its $1.1 billion cash flow revolver. Total debt outstanding was approximately $3.2 billion, consisting of $2 billion of senior unsecured notes, $1.1 billion of term loans and revolver draws, and $91 million of finance leases and other obligations. Additionally, pro forma net leverage was 6.3x compared to 6.2x at the end of the previous quarter, as the trailing 12-month EBITDA declined sequentially. Now, let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results. I'll start with Global Pet Care, which is Slide 11. Reported net sales increased 0.5%. Excluding unfavorable foreign currency impact of $7.6 million, organic sales increased 3.1%. Net sales improved in the second quarter as compared to the first quarter, which was pressured by customers' focus on inventory management, leading to lower replenishment orders. Organic sales in both the US and internationally increased over last year, as demand for companion animal categories remained strong, offsetting softness in the aquatics category occurring across all markets. Sales were also helped by new price increases in EMEA and by the impact of pricing actions taken globally throughout last year. Our EMEA sales were adversely impacted by unfavorable foreign exchange rates as the dollar strengthened against the British pound and the Euro compared to last year. Adjusted for FX, sales increased in EMEA due to growth in the companion animal category, mainly driven by our dog and cat food sales, which offset declines in aquatics, as we continue to compare to strong prior year aquatic environment and equipment sales. Most of the planned price increases in EMEA announced during the first quarter have been successfully implemented, with a few starting in the third quarter. The price increases are offsetting cost pressure from unfavorable FX and energy inflation that we continue to experience in our international business, which are in line with our expectations. Sales in the Americas also benefited from strong growth in our companion animal categories, offset by declines in aquatics due to challenging prior year comps. However, while our overall aquatic sales declined, sales for aquatics nutrition products continued to show growth. On the cost side, we experienced inflation in line with our expectations, and are encouraged by the fact that costs have either stabilized, or in some cases, are starting to retreat. That said, we will continue to closely monitor input costs and strategically price as necessary. Fueled by innovation, our global Dog Chews business recently achieved an exciting milestone by surpassing $1 billion in retail sales. Exciting innovation, unique form factors and flavors, seasonal offerings, and global expansion, have fueled that growth. In Q2, we launched innovation in the highly digestible Rawhide segment through the Good 'n' Fit brand in the US, which has already gained distribution in mass and drug channels. In Europe, earlier in the year, we launched the Tough ‘n’ Tasty line under the Good Boy brand have seen success in both the UK and in Germany, which is a new market for the brand. Additionally, in Europe, we launched new flavors and sizes in the IAMS brand have expanded the Eukanuba brand into the Wet Cat Food segment. Both have been well received, and are one of the catalysts behind the strong growth our dog and cat food business is experiencing. Adjusted EBITDA for GPC increased to $46.3 million. The increase of $5.7 million was primarily driven by favorable pricing, including the incremental pricing actions in the EMEA region and our continued focus on cost reduction measures, including the fixed cost restructuring we initiated last year, and further cost action during the first half of this year. This was partially offset by lower volume, the unfavorable impact of FX, and the impact of capitalized variances, as we continue to sell our high-cost inventory from last year. On a positive note, the unfavorable impact of capitalized variances from the prior year high-cost inventory is now behind us, and we are already seeing our margin profile improve. We expect to see the positive sales trend continue in the second half of the year. We remain cautious about performance of certain categories within the pet specialty channels such as aquatic environments and hard goods within companion animal, as the rates of new entrants settle to pre-pandemic levels, but we expect the positive trends in companion animal consumable categories to more than offset these pressures. Overall, the category fundamentals remain strong, especially within consumables. This is encouraging as our business is becoming more aligned to consumable products for your pet, which represents over 80% of our total revenues. The GPC team remains focused on the execution of our long-term strategy, which is centered around inspiring more 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, which is why we remain bullish about the continued growth of this business. Moving now to Home & Garden, which is Slide 12, net sales decreased 22% in the second quarter, driven by a higher-than-expected reduction in retail inventory compared to a strong prior year build ahead of the season. Adverse weather conditions late in the quarter also negatively impacted the pest controls category POS, and resulted in lower replenishment orders. This was partially offset by the impact of price increases. Sales of cleaning and restoration products also decreased due to POS decline in our relevant categories, as well as comparison to last year inventory loads during the quarter. Slower start to the spring-cleaning season also contributed to the POS decline in the quarter. The weather has been a mixed story so far this year, with some very positive POS weeks, mixed in with negative POS weeks due to cooler weather. As I mentioned earlier, there is a shift in the retailer strategy, and our key retailers are maintaining significantly lower inventory levels compared to last year in the second quarter. We now expect this trend to continue, leading to further retail inventory decline in the third quarter to pre-COVID levels. This reduction will directly impact our sales expectations in the second half. That said, we still expect high single-digit POS growth in the second half of the year, and believe that consumer demand will remain strong, with the weather outlook pointing to a more normal season, with higher temperatures and humidity. As a reminder, on average, around 70% of POS is achieved in the second half of our fiscal year. We continue to believe in our strong innovation that is reflected in new products that are now being rolled out to the marketplace. On our Spectracide brand, we now have available the new One-Shot platform, a program designed to bring to market new ingredient technologies and superior delivery systems across several categories. First product under this platform is One-Shot Premium Weed and Grass Killer, a product designed for a highly demanding consumer that is willing to pay a premium for superior results. Traditionally, Spectracide has focused on consumers looking for strong results at a great value, and our One-Shot platform allows consumers to find also a superior performance option with the brand they trust. In repellents, we now offer new

Thanks, Jeremy. Thanks, everybody, for joining us on today's call. Let me just take a couple of minutes here to recap the key takeaways on Slide 17. Look, first, the resolution of the DOJ challenge of Assa Abloy's acquisition of our HHI unit is our most significant achievement. We're well on our way now to completing this transaction on or before June 30th. With the successful completion of this transaction, we will be able to meaningfully strengthen the balance sheet, and we'll immediately start the process of deleveraging. This transaction will also bring us much closer to our long-term goal of becoming a faster growing, higher margin pure play pet and home and garden company, and it'll allow the team to now devote resources and prioritize long-term growth of the remaining businesses in the company. Second, while we're facing some headwinds in our Home & Garden business related to a change in retailer inventory strategy, and the fact that they were more severe than we anticipated, that's now going to impact our fiscal ‘23 results more than we originally planned. But we remain confident in the long-term strategy and our ability to deliver value to our consumers and customers worldwide. Last, we have successfully pivoted the teams to focus on profitability, working capital discipline, and cost management, as evident from our inventory reduction and cashflow generation thus far in the fiscal year, as well as the positive results of our fixed cost reduction actions. I want to close today by reiterating that I remain very optimistic about the future of our company, and I believe we are well positioned to execute on our operational goals, generate cash flow in fiscal ‘23. I'm very excited about the strategic pivot that we're on now and we're going through as we sell HHI to Assa. And I want everyone to know the future of Spectrum Brands is brighter than ever. I'm going to now turn the call back to Faisal, and we can begin Q&A.

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

Thank you. [Operator Instructions] Our first question comes from the line of Peter Grom with UBS. Your line is open. Please go ahead.

Thanks, operator. Good morning, everyone. So, David, it's been a while since you really discussed the use of proceeds in detail, and I appreciate the commentary around targeting net leverage in the 2x to 2.5x range and that you plan to return cash to shareholders via buyback. But have you given any consideration to the size of the buyback and what the program could look like at this point?

Hey, Peter, thanks for the question. Look, I mean, I guess the lower the share price, the bigger the buyback, is my answer. Look, at the end of the day, right, we still haven't closed. We literally just got through DOJ last week. This week, it's been the board and today's earnings calls. We're very confident in closing this deal on or before June 30. The last nine months has really been us trying to get the balance sheet healthy. And working off a bunch of inventory here has really hurt the P&L. But I believe, look, we're going to pivot this balance sheet pretty quickly here and now we're going to really focus on pivoting the P&L and getting the profits going in the right direction. But look, I would like to meaningfully shrink our flow. And depending on where the share price is when we close the HHI deal, we'll communicate further, but I don't want to pigeonhole myself right now. I want to get to a close. I want to recapitalize the balance sheet and then we'll communicate then, but we will be buying in shares, yes.

Okay. That's helpful. And then just on the deal, it seems like the press release has said there was one regulatory approval outstanding in Mexico. Is that something we need to be worried about? Is it progressing in line with expectations? And I guess, assuming that goes through, how quickly can you close after you get that approval?

Yes, I think we’re just going to have to stick to the script here. I mean, yes, Mexico needs to approve the deal. We think they will approve the deal. We don't expect any issues with it. We intend to close the deal on or before June 30.

Great. Thanks so much. I'll pass it on.

Thank you. And one moment for our next question. Our next question comes from the line of Bob Labick with CJS Securities. Your line is open. Please go ahead.

Good morning and congratulations on the DOJ settlement.

Hey, Bob. Thank you.

Thanks Bob. Long time coming.

Yes, no, it was a nice theater, but it's a good outcome obviously.

I didn't enjoy the theater, but thank you.

Fair enough. I wanted to just take a half step back and say, we're talking about a lot of macro and near-term inventory and all that kind of stuff right now. Any of the discussion on today's call impacting the calendar ‘24 outlook for the businesses? Or are we just kind of caught up in a lot of noise because we have to be, because that's the world we live in?

Yes, look, I think I'd like to talk to investors directly, right? I think, look, there's clearly been a lot of orbs in the stock. You buy stuff on the room or you sell on the news because there's over $100 a share in cash coming into the company here in the next month or so, month or two. Look, at the end of the day, a fundamental investor should zoom out and realize that COVID pandemic, the supply chain elongation, the spike in demand from our retail customers, has caused a very large object to have to pass through the snake, right? And we ballooned our balance sheet to help our retail customers through, hopefully, in my lifetime, a once in a lifetime event. And when you take your balance sheet up $400, $500 million to try to satiate retailers' demands and then that supply chain snaps back and then demand drops off a cliff, liquidating for us a small company almost $350 million, $400 million of inventory, you're not going to do that in the most gentle way. And so, that really damages your P&L, and it's very difficult - look, I'm very upset about our Home & Garden performance in the quarter, but the reality, it's very difficult to anticipate a retail shift from, if you traditionally build inventory going into a season where you sell everything in 90 to 120 days to, well, hey, we're just not going to pre-build this year and oh, by the way, we're going to just take the inventory level down to pre-COVID levels, that's a big change in strategy that's very hard to - I just can't dig out of it in the next six months given the seasonal nature of the business. But I think if people can kind of look at the fundamentals, we're going to have a very clean balance sheet. We're going to be net debt-free, and then we're going to get this P&L going in the right direction. So, I'm actually - look, I'm disappointed that the quarter wasn't better, but I'm really excited about what we can deliver to you guys this summer in terms of cleaning up the balance sheet and showing a lot more clarity as we've gotten through the distortion, as you call it, with the inventory, balance sheet, P&L distractions.

Yes, and I'd just add, Bob, I think as I think towards first the second half, as we talked about on the call, we have seen a margin inflection point as that entire, basically the entire $55 million of cap variances we entered the year with is gone at the end of Q2. There might be $1 million left in HPC in Q3, but that's it. That's not only a second half tailwind, that's a 2024 tailwind. And then the other thing I would mention is that I don't know if we were completely explicit about it, but the reality is, our sales in H&G in fiscal ‘23 will basically be below POS as a body of work, as a body of consumer demand. And I would not expect that to continue in F ‘24. So, I think there's positive news ahead for H&G as we look to ’24. Agree with David. Unfortunate we are where we are this quarter. It would've been a really nice quarter had it been a more normal season for us.

Okay, great, thanks. And then just again, taking us back from previous calls, we've talked about, I believe you've said you believe the pet business is a $200 million EBITDA business, $200 million-plus. The H&G is $120 million-plus. Are those still the right kind of starting points when things normalize? I won't pinpoint you to a time period for it, but just in general, has anything changed materially in those businesses? Are those the right sizes for those businesses as we normalize?

In my mind, those are the right numbers still, Bob.

[Multiple Speakers].

Okay, super. All right. Fair enough. I'll get back in queue. Thanks.

Thank you. And one moment. Our next question comes from the line of Olivia Tong with Raymond James. Your line is open. Please go ahead.

Great, thanks. Good morning. I wanted to ask first on lawn and garden, because I get that the weather was unfavorable. We've obviously seen that across other companies already, but your sales seemed to have been hit more this quarter than they were. And I always thought relative to some of your peers that your portfolio was skewed a little bit later in the season, given the internet-controlled focus. So, what's your view on how much of this is weather versus a new normal on inventory or other factors that might be playing into that like buying closer to demand and normalization of demand? Thank you.

Yes, I don't attribute a ton of it to weather. I mean, I think we had some spotty weather that could have helped us a bit later in March. The second half of March wasn't great. POS the first half was pretty good, but it really is about a shift in retail strategy where we were really expecting to see retail inventories normalize to 2021 levels. And the reality is, to David's point earlier, they're going back to pre-pandemic levels. Think like 2019 levels. Inflation adjusted, that's even lower volumes because we do have a lot of price there. And that, as I said in reaction to Bob's question, that's led to really low retail orders on us despite POS that's fairly normal because they're taking their inventory down. Now, they've been largely successful with that in the first half of the fiscal year. They, meaning our big three retailers, though there is still some pockets we see where it's higher. I agree with your comment that as compared to some of our public peers in this space, our season is a bit later, but the strategy specific to our categories is one that we just did not expect as we entered the year.

Got it. And then wanted to ask you about HPC and your view in terms of the timing of exploring strategic alternatives. You mentioned inventory is now right-sized in your prepared remarks, but also that small appliances continue to be under pressure, especially in kitchen. So, it looks like margins will be down again this year. So, as you think about closing up, and I don't need to start to immediately go into strategic alternatives on another business before HHI closes, but any color in terms of how you're thinking about eventual exit strategy of that business so that you can get towards your longer term goal of getting to be a two-category company. Thanks.

Yes, look, I think the post-pandemic kind of fallout in that industry, it’s definitely going to take us a couple of quarters to nurse that back to a proper level of profitability and health. And so, I think you shouldn't anticipate us spinning that off or merging that the day after we close HHI. I think that's going to take multiple quarters. But we are very interested as a Board of Directors into becoming a pure play pet, home and garden company. And we'll be very actively pursuing that this summer going into the fall. But we want to be responsible. We want to nurture that business. We want to build that EBITDA back up and then we'll see what's available.

Thank you.

Thank you. And one moment please. And our next question comes from the line of Chris Carey with Wells Fargo Securities. Your line is open. Please go ahead.

Hey, everyone. Good morning. So, the debt paydown, right, term loan and revolver, I don't think that puts you at your leverage targets. So, I guess the first question is, do you anticipate getting to your longer-term leverage targets immediately or would that happen over time? And then Jeremy, do you still expect $3.5 billion net cash from the deal?

Well, let me back up. Your question is a little off. So, if I get $4.3 billion of cash in the door, I only have $3 billion of debt and my leverage ratio is a net debt leverage ratio. So, I'm net debt free. So, my net leverage when I close the deal is negative.

Yes, no, that's fine. So, the goal is still term loan revolver, and then the rest of the debt, you'll assess, and the residual cash will remain on the balance sheet for buybacks or other strategic initiatives. That would be the key idea here.

Yes, I mean, look, when we signed this deal, interest rates were zero, right, in terms of deposits And we have some bonds out there that are sub 4%. So, we’ve got to look at the whole cap structure, but it's a pretty good situation to be in. And we want to stay liquid. We want to have plenty of firepower to buy in shares, and we want to maintain a very low leverage profile as we restore our earnings power from this point on. So, yes, we're pretty excited to get this closed and then to be able to focus. Not trying to make excuses, but having a big asset dangling out there for sale for two years has consumed a lot of calories.

Yes, that makes sense.

Yes, I think too, Chris, so if you look at the bonds and the capital structure too, right, our highest cost bond I think is our 2025. And that has a stepdown to callable at par in July. So, that's obviously something we'll take a look at. And then as the year progresses, we kind of have a 12-month window on reinvestment with proceeds. We'll look at the whole portfolio and figure out the right strategy. To David's point, a lot more financial flexibility and timing flexibility, given where interest rates on deposits are now, which I think is a good thing for us and for our shareholders that we have time and we could be thoughtful on this.

And then just on the net cash proceeds?

Pardon? Oh, yes.

You had said …

Yes, 3.5 to 3.6 net proceeds is the ballpark.

Okay. All right. Thanks. And then just a follow-up, this conversation on earnings power I think is well taken. Clearly, cost headwinds in the front half. You're cycling high-cost inventory, and obviously the retail dynamic is something we're seeing elsewhere. I guess, I'm also looking at fiscal ‘24 EBITDA consensus, which is going to be 30% growth versus where you're effectively guiding today, which certainly seems like a high bar. The recovery here, I mean, are you expecting a quick snap back in your margin structure and sales, or is it more appropriate and maybe prudent to think about a progressive build here back to the earnings power that you had thought about for this portfolio?

Yes, I mean, I think to my comments on the cap variances that we experienced, right, so that $55 million, I think rolled off 25 and 29, Q1 and Q2, respectively. That debit, excess debit, the cost of goods sold, effectively goes to zero in Q3. So, I think you're going to see a really nice sequential improve, particularly in Global Pet Care, which doesn't face - it doesn't really face the retail inventory strategy change that Home & Garden is facing. So, I think the second half looks really good there and moves pretty quickly. HPC is a bit of a different story, to David's comments on what's happened in that category. So, a little more cautious, but we still have that sequential improvement in margins that comes from those cap variances being gone. And then you have Home & Garden, and we've obviously talked that to death here. But I think that gets better as we go into ‘24.

I like your word progressive. We need to get our house in order. We need to really get refocused and start to execute consistently. I like the word progressive, but we've got a very good outlook.

Okay. And forgive me, I know I’m kind of dominating here, but I get this question a lot, so I figure I'd just put it to you, then I'll get back in the queue. The cashflow conversion to EBITDA is phenomenal year-to-date. I realize there's the working capital dynamic with working down inventory. Do you have a sense of what your free cash conversion should be over time in a more normal environment? I don't know if just EBITDA, as a percentage of EBITDA is a great way to think about that, but any comment there on cash flow being seemingly an even bigger focus for you now, but it's atypical this year. So, what's the medium term dynamic looking like from a cash conversion standpoint?

I usually model it at 50% of EBITDA, Chris, in our longer term models. I think that's a safe assumption to use. Really confident in our revamped supply chain team. The experience that we've had the last three quarters taking inventory down $340 million, I think we're going to stay really tight on inventory. And in a business like ours with the large customers that we have, inventory is the real only wild card in free cash conversion from EBITDA. So, I think 50% is a safe way to assume it.

Okay. All right. Thanks so much.

Thank you. And one moment for our next question. Hi, next question comes on the line of Ian

Great. Thank you very much. So, when I think about your proceeds, how much do you think you need to pursue, let's just say tuck-in M&A, how much do you think you need to invest in the business? There's a question on the buybacks and stuff like that, but I'm kind of more looking at it from an M&A perspective and then also just investment in the business. Thanks.

Look, I think going forward, we don't have anything we want to acquire right now.

Okay, good. And then I know you've kind of reiterated that you've (sustained) net proceeds. How are we thinking about the NOL exiting or after the close of the sale? Is it going to be exhausted? Is there going to be anything left? And then maybe just an update on kind of like the fees that you've been facing now versus what you've been expecting. Thanks.

Jeremy will take that.

Yes. We'll essentially use the entire US NOL to protect the gain. We will become a constant US taxpayer after this deal.

Okay, good. And then the proceeds, I guess, are the same, regardless of like all the inventory adjustments and inventory changes, right?

You're asking about the net proceeds? We still think the net proceeds after taxes and fees will be in the $3.5 billion to $3.6 billion range.

Okay, perfect. Thank you very much.

Thank you. And one moment for our next question. Our next question comes from the line of Brian McNamara with Canaccord Genuity. Your line is open. Please go ahead.

Hey, good morning. Thanks for taking our questions. Don't mean beat a dead horse, but in terms of a potential board authorization of a buyback, is it as simple as that just can't be done until the proceeds come through the door?

No, we already have $1 billion buyback, and I've got $750 million bucks available to me right now this morning. I've just been living with a very, very levered balance sheet, and I personally have a lot of equity at risk, and I want to get this balance sheet delevered and see where the share price is, and we'll go from there.

Got it. And then secondly, you've had a very consistent message in terms of debt paydown on the fact that your shares are inexpensive. With the stock now trading below where it closed before the HHI settlement came out last Friday evening, I'd be curious your view on why the market is not giving you guys credit for this gamechanger for your capital structure. Thanks.

I think shareholder bases change over time, and I think that today's world, it's very rare to find somebody that looks at stocks for more than three minutes, let alone three weeks. And I think that when you have a deal that gets as much press as this $4.3 billion sale to HHI, you attract a lot of quants and orbs, and we love quants and orbs, but when they see your share price pop, they tend to sell into it. There's been a lot of volume on the tape, and we're getting a lot of rotation, and that's just technical stuff. But it's - I can't do anything about it, nor can I worry about it. I can just focus on the fact that sitting here before the call, talking to my R team, I think we're going to have a very different shareholder base when you look at the - people don't like levered credits. You get leverage down to 2x and stay there consistently, you're going to attract a different shareholder base. You start growing your EPS consistently, you're going to attract a different shareholder base. So, that takes time. That's not a - you don't fix that in three days or a week. That's kind of a three, six, nine, 12-month journey, and I think that's the journey we're going to be on.

Great. Thank you. Best of luck, guys.

Thank you. And one moment for our next question, and our next question comes from the line of Stephen Powers with Deutsche Bank. Your line is open. Please go ahead.

Yes. Hey, thanks. Good morning. Most of my questions have already been addressed, so thank you. Just on the 2x to 2.5x long-term net leverage ratio objective, I guess, what does that mean in terms of timing? Like from your perspective, when do you want to kind of be at that run rate? And as you contemplate the future, is that kind of exiting fiscal ‘24? Is that longer-term than that? Just some parameters around what you mean by long-term objective would be helpful.

As I sit here this morning, I don't have a time in mind. We're simply trying to let you know we want to run the business less levered, and we put a marker out there. We don't have any acquisitions teed up. We really want to get the earnings power of the company much healthier. And again, I'm not trying to make an excuse, but having a big asset held for sale is really, really disruptive and distracting. And I think it'd be nice to just settle the business down and invest in some organic growth and really get a decent rhythm and cadence. So, we owe that to our investor base. We owe that to ourselves. And so, yes, I mean, I don't know. I mean, Jeremy, you have any thoughts on that?

No, I think that's right. It'll be dependent on what we see in the market from an acquisition perspective. It'll be dependent on economic conditions in our key markets. I think time is in our favor here. We're excited to have a very different balance sheet to show our investors next quarter. And we'll make good, smart decisions on capital allocation as this year and next year progress.

Okay. Fair enough. Thank you.

Thanks, Steve. Operator, I think we have time for one more.

All right, one moment. Our last question is going to come from the line of Michael O'Brien with Wolfe Research. Your line is open. Please go ahead.

Hi. Good morning, guys. Yes, most of my questions were already answered. One quick one. You guys have talked about in the past of putting your price increases through. I just wanted to confirm if they're all through for the year or can we expect more in the quarters ahead? I just quickly noticed that your cost of goods sold is a little higher than normal. So, I was just wondering when those margins would normalize. Thank you.

Yes, I would say, I don't see any material additional price increases based on inputs where they are now, particularly for this year. So, I think everything we need to do is in place. On the cost of goods sold front, agreed, it's elevated in Q1 and in Q2. And that goes back to the capitalized variances that I talked about earlier. That's an extra $25 million in Q1 and $29 million in Q2, I think of cost of goods sold running through the remain co-businesses that we would expect. And it is essentially gone now. So, that will basically reduce and improve margins in Q3 and Q4.

Okay. Great. Thank you.

Thank you. And I would like to turn the conference back over to Faisal Qadir for closing remarks.

Thank you. With that, we will conclude our conference call. Thank you to David, and Jeremy, and on behalf of Spectrum Brands, thank you all for your participation.