SPB - NYSE

Thank you for standing by, and welcome to the Spectrum Brands Third Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Joanne Chomiak, Senior Vice President of Tax and Treasury. Please go ahead.

Welcome to Spectrum Brands Holdings Q3 2024 Earnings Conference Call and Webcast. I'm Joanne Chomiak, Senior Vice President of Tax and Treasury, 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. 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; and Jeremy Smeltser, our Chief Financial Officer. After opening remarks, we will conduct the 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 8, 2024, 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 statements. 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 section. Now I'll turn the call over to David Maura. David?

Thanks, Joanne. Good morning, everybody, and welcome to our third quarter earnings update. We appreciate everybody joining us today. Like usual, I'm going to start this call with an update on our operating performance and our strategic initiatives. Jeremy will then provide a more detailed financial and operational update, including a discussion on specific business unit results. During our first quarter and second quarter calls, we talked about how the actions we've taken in fiscal 2023 put us in a position to start on our journey back to winning this year. Our teams have worked extremely hard over the past years to put us in a position of competitive strength. Through years of asset sales, we have deleveraged our company, returned capital to our shareholders and turned our operations around. We are now focused on driving top-line growth through our commercial investments. In fact, over the past five or six years, we have reduced our gross debt by approximately $5 billion. We are now the lowest levered company in our peer group. During that time, we also returned $2 billion to our equity shareholders through share repurchases, while also maintaining our quarterly dividend. Our balance sheet is the fuel that has been providing us the financial flexibility to make meaningful improvements in our operations. And we have now developed a strong S&OP process, reduced our inventory levels and meaningfully increased our fill rates. With our operational house now in order, we have the confidence to pivot toward making meaningful investments in our brand-focused advertising, marketing and innovation. Our flywheel starting with our strong balance sheet, the strongest in the history of our company is now in motion. We now have the right leadership and talent in our operations team to deliver improving performance from supply chain to working capital management, the inventory management, fill rates, all of these are now being used to fuel commercial growth aspirations we have for our company. Today, I'm happy to let you know that this quarter marks another mile marker on our winning journey. As I've said, the playbook to winning is to consistently do what we say we are going to do and deliver for all of our stakeholders. And this third quarter is an incremental step forward on that journey. In these times of economic and geopolitical uncertainty, we are controlling what we can control. And we are setting ourselves up for the future through incremental investments into our brands and our momentum is continuing. If I could now ask everyone to please turn to slide 6, and let's go over the financial performance for the quarter. During the first half of this year, you'll recall our top-line was suffering from the headwinds of SKU exit decisions that we made during fiscal 2023, and this has negatively impacted our net sales number this year. Our gross and adjusted EBITDA margins have been realizing the tailwind benefit of slower -- of selling lower cost inventory as compared to the prior year. As I told you last quarter, the effect of these factors on our comparables are largely behind us, and we expect to now see sales growth in the second half of the year. Our teams, in fact, delivered on that commitment, with net sales growth of 6% and organic sales growth of 7.1% this quarter. Across the company, volume was the primary driver of this quarter's top-line growth, and each business unit grew its top-line with our Home & Garden business delivering an impressive 13.1% top-line growth as compared to last year. The weather conditions in key regions improved over the course of the quarter with more ideal temperatures and precipitation levels, especially compared to those we've seen in the prior two selling seasons. Also, inventory at our retail partners is healthier than last year, and our sales were much more closely aligned with point of sale than in the prior year. We actually saw spikes in retail orders in regions where weather conditions were expected to result in increased foot traffic. Importantly, once the consumer was in the store, we want it shelf with our full funnel marketing investments driving sales and supporting our brands with Spectracide taking market share in the controls category. We have one more quarter to go in the Home & Garden season with about 40% of the POS still ahead of us in Q4, which is a strong quarter for consumer demand for household and the repellent categories. Our Global Pet Care business grew organic sales by 4.1%, and our Home & Personal Care business grew organic sales 6.1%. I am particularly pleased that the organic sales in both our North American Home Appliance business and our Global Aquatics business stabilized this quarter. Both of these categories have been facing major headwinds. And while we are cautious about the future, we're very encouraged to see demand improving. Our growth momentum in e-commerce continued with another quarter of over 20% growth compared to last year. E-commerce sales represented over 21% of this quarter's total net sales. While HPC is leading the way with e-commerce sales growth of over 33%. Each business realized double-digit growth in e-commerce sales this quarter. Including investment income, our adjusted EBITDA was $106.3 million, up from $99 million the period a year ago, with strong improvement across all three business units. Excluding investment income, our adjusted EBITDA was $93.6 million. Our gross profit margin of 38.9% increased 310 basis points compared to the prior year. We delivered this growth in spite of investing almost $23 million more in brand advertising and innovation this quarter compared to last year. The improved gross margin was driven by our team's focused on driving continuous improvements within our operations and through operational efficiencies, cost savings and plant productivity improvements. We remain disciplined with our cost structure to ensure that we stay lean and do not add back the fixed cost that we took out of the business in the past. This was a pivotal quarter also for our balance sheet. Since the close of the HHI divestiture, we have been carrying a significant amount of cash, maintaining our options for redeploying these proceeds. As we approach the one-year anniversary of that transaction's close, we launched and closed a debt tender across our existing bond portfolio to satisfy our covenant requirements to our bondholders. Through a combination of tenders and calls, we retired $1.174 billion of our bonds, and we have no remaining obligations for the HHI proceeds. To improve and simplify our capital structure with new capital, we also issued $350 million of a 5-year unsecured convertible security with a coupon rate of 3.375%. These bonds are exchangeable into our shares upon certain events at an original strike price of approximately $122 a share. As this is common with these types of bonds, we entered into a cap call structure to increase the economic conversion price for the company to approximately $159 per share. Taking the cost of the cap call into account, the effective borrowing rate on these new bonds is approximately 4.8%. We closed this quarter with cash and short-term investments of $307 million and with our net debt at $271.6 million, and our total liquidity position is close to $800 million. With our cash balance and capital structure reset to support our business, we will now no longer reference EBITDA, excluding investment income as a metric going forward. If I could now ask you all to turn to slide 7, and we can go over the strategic priorities of the company going forward. While our operations team continued to deliver for our company, our fill rates are now in the mid- to high 90s in each business with inventory levels that are over 45% below our peak amounts. We are staying very disciplined on our inventory levels, and we've taken $375 million of inventory out of the system compared to our peak levels. Compared to last year's quarter, our inventory is $88 million lower. Inventory turns are up to 4.2 times and they've improved 40 basis points. We intend now to actually build inventory levels this quarter to support our home and personal care holiday season, and we will increase safety stock now to support our Global Pet Care's global growth strategies. We continue to realize the benefit of having less inventory on the balance sheet, which is helping contribute to our improved gross margins and adjusted EBITDA by reducing the costs that come with carrying higher inventory levels and low fill rates. We're also now investing behind our people to improve our commercial capabilities and drive a high-performance culture with accountability. Our new talent additions across our sales and marketing functions are beginning to have a positive impact on our financial results. Our stepped up investments in our brands and new product road maps accelerated this quarter. Our sales growth is now a testament that they are working. In this quarter alone, we made almost $23 million more in brand advertising and innovative focus -- innovation-focused investments just compared to a year ago, and we're on track to invest approximately $50 million more for the full year. The increased investment is the largest contributor to our EBITDA margin declining to 12% this quarter, excluding investment income compared to last year's 12.7%. The most significant increase this quarter was in advertising spend, especially in our Home & Garden business, driving consumer demand during our peak season toward our brands by commuting not only the efficacy of our products, but the tremendous value proposition that our products offer the consumer, and this created consumer excitement in the marketplace. Our HPC business continues to improve its performance, exceeding last year on every key metric and reinforcing our confidence that the time is right to separate that business via a sale, merger or spin. Our Global Personal Care business grew organic sales mid-double digits, and our Global Home Appliance business had modest organic sales growth. We continue to win new listings now in brick-and-mortar across the personal care and home appliances categories. HPC's investment in digital marketing and activation drove the highest Amazon Prime Day sales ever for this business unit. This business is consistently meeting and exceeding expectations now and is not only stabilized, but it's back to winning. This quarter, our internal teams and advisers continued the dual track process of the separation of our HPC business, preparing this unit for a sale, merger or spin-off transaction. The process is progressing as anticipated. Our bankers are working actively with potential buyers on the M&A track and we filed a Form 10 initial registration statement in early July to begin the SEC registration process for a spin-off. Our teams are focused on separation readiness doing the prework required for transactions of this nature, and we continue to believe that the separation of HPC will allow both Spectrum Brands Holding Company as a pure-play patent Home & Garden business and then the separate HPC business to flourish independently focusing on the unique needs of each business. We will provide an update on our next earnings call or sooner if there is news to share. If we could now please turn to Slide 8, and we have an update here on our share repurchase program. We repurchased 1.6 million shares this quarter. And since the close of the HHI transaction, we've returned over $1 billion to our shareholders through our various share repurchase programs. Our share count is now approximately 32% lower than it was prior to the HHI close. We have approximately $400 million remaining on our recently refreshed share repurchase authorization program and with leverage still well below our long-term target range of 2.0 times to 2.5 times. We have plenty of capacity to fund investments into our company and to continue to return value to our shareholders through quarterly dividends and opportunistic share repurchases. Now turning to Page 9. Based on our results for the year-to-date and the trends in our retailer and consumer behavior, we are updating our earnings framework. While we continue to expect net sales to be relatively flat compared to the prior year. However, including investment income, adjusted EBITDA is now expected to grow approximately 20%. This framework assumes that the favorable weather trends we've experienced this season continue as we head into a peak POS quarter for our household and repellent products segments. We are also assuming that e-commerce sales across the businesses continue to be strong, and that the sales recovery in Small Kitchen Appliances and Global Aquatics continue. Our businesses have performed well this year as we have leaned into the competitive advantages that our strong balance sheet and improved operating cadence that provided. But we remain cautious about the remainder of the year and headwinds heading into fiscal 2025 from the geopolitical and macroeconomic uncertainty. As we head into the holiday quarters, we're closely watching the health of the consumer as interest rates, food and housing costs remain high. Consumer health is uncertain and volatile, not only in the U.S. but across our global economies. Recently, ocean freight rates have risen as the geopolitical challenges stemming from the Red Sea crisis coupled with peak season volume have caused vessel and equipment shortages. While we continue to shift the predominance of our product under contracted rates, demand has caused us to shift some volume at spot rates, which is creating headwinds for future quarters that we will now seek to offset with cost improvement and plant productivity. In spite of these uncertainties and headwinds, we intend to continue to invest behind our businesses, meaningfully increasing our brand-focused investments in the fourth quarter to set us up to drive sales in fiscal 2025. Each quarter that we deliver on our commitments reinforces our belief that we are on the journey to winning. Now before I turn the call over to Jeremy, I want to take a moment to thank each and every one of our global employees who are all on this journey together and for their roles in contributing to our collective and mutual success. Now you're going to hear a little bit more from Jeremy on the financials, and he'll give you updated business unit insights. And then we'll come back to you for some Q&A here at the end. At this time, I'd like to turn the call over to you, Jeremy.

Thanks, David. Good morning, everybody. Let's turn to Slide 11 for a review of Q3 results from continuing operations. I'll start with net sales, which increased 6%. Excluding the impact of $8.5 million of unfavorable foreign exchange, organic net sales increased 7.1%, primarily due to favorable weather conditions and improved retailer inventory health in our Home & Garden business, along with continued growth in e-commerce across all segments. Gross profit increased $39.3 million and gross margins of 38.9%, increased 310 basis points, largely driven by increased volume lower freight costs and inventory-related expenses and impacts from cost improvement actions. Operating expenses of $255.1 million, decreased 34.3% due to the absence of goodwill and intangible asset impairments compared to last year, partially offset by increased investment spend in advertising and marketing as we reinvest in our brands. Operating income of $47.7 million improved by $172.4 million, driven by the gross margin improvement and lower operating expenses I mentioned. GAAP net income and diluted earnings per share both increased primarily driven by the higher operating income, higher investment income, lower interest expense and a lower share count. Adjusted EBITDA was $106.3 million, an increase of 7.9% or $7.8 million over last year, driven by improved gross margins and investment income of $13 million, offset by almost $23 million in increased brand-focused investments. Adjusted EBITDA, excluding investment income was $93.6 million. Adjusted diluted EPS increased by $0.17 to $1.10, driven by higher adjusted EBITDA and the reduction in shares outstanding. During the third quarter, we returned $142 million to shareholders through our share repurchase program and reduced our outstanding shares by approximately 5% or 1.6 million shares. Our current share count is approximately 32% lower than it was prior to the closure of the HHI transaction. Turning to Slide 12. Q3 interest expense from continuing operations of $15.7 million, decreased $14.6 million due to our lower outstanding debt balance. Cash taxes during the quarter of $4.4 million, were $5.5 million lower than last year. Depreciation and amortization of $25.2 million, was $2.6 million higher than last year, and separately, share-based compensation was flat. Capital expenditures were $10.1 million in Q3, down from $18.4 million last year. And cash payments towards strategic transactions, restructuring-related projects, and other unusual nonrecurring adjustments were $10.5 million versus $10.3 million last year. Moving to the balance sheet. We had a quarter end cash balance of $158 million, plus $149 million in short-term investments and $490 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $578 million, consisting of $496 million of senior unsecured notes and $82 million of finance leases. We ended the quarter with $272 million of net debt. Now let's get into 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 on slide 13. Reported net sales increased 3.6%, and excluding unfavorable foreign currency, organic sales increased 4.1%. Organic companion animal sales increased in the mid-single digits, while organic aquatic sales were flat to last year, with growth in aquatics consumables, offset by continued softness in new environments and equipment. GPC sales in North America and EMEA grew this quarter. North American companion animal sales grew from strong performance in the e-commerce and food and drug channels, offset by some softness in mass and dollar channels. Companion animal sales and EMEA also benefited from strength in e-commerce and growth in our Good Boy brand. The decline in North American Aquatics sales is tempering and aquatic sales continue to grow in EMEA with good performance in PON nutrition products this quarter, aiding our consumable sales. Global GPC e-commerce sales increased by double digits, continuing the recent trends in consumer behavior is moving to online buying for pet products. E-commerce sales were in the mid-20% of GPC's global sales this quarter and year-to-date. On the innovation front, we recently launched good and tasty dog treats in the US further expanding our presence in the nearly $5 billion US pet treat market. The early results are promising with Good 'n' Tasty already demonstrating a positive halo effect from our well-established Good 'n' Fun brand, driving increased brand awareness and household penetration. This demonstrates the power of our multi-branded portfolio and our ability to leverage brand synergies for both core and adjacent category growth. We are also seeing encouraging early traction in our Ferminator Consumables segment with our new tub-free grooming offerings in the pet specialty channel. This innovative format is resonating with consumers, opening up new avenues for growth in the pet grooming category. We also entered the fast growing adjacent category of wet dog food in the UK this quarter with the launch of Good Boy Home Phase, securing listings in major retailers and promoting natural media recipes across the range. This was the second best adjusted EBITDA quarter ever for GPC after posting the highest adjusted EBITDA quarter ever in the second quarter of this year. Adjusted EBITDA for GPC grew by $3.1 million to $56.7 million, primarily driven by higher sales volume, a favorable comparison to last year's higher input costs, operational productivity improvements and favorable mix, partially offset by unfavorable FX. GPC also significantly increased its brand building investments this quarter. This is the sixth consecutive quarter of year-over-year growth for GPC and fifth consecutive quarter where the GPC business delivered adjusted EBITDA of over $50 million, giving us confidence that our model of investing in innovation to drive growth as a market leader is working. The commercial investments we are making in brand advertising, trade promotions and new innovation launches are supporting our sales growth. Let's move now to Home & Garden, which is on slide 14. Net and organic sales increased 13.1% in the third quarter, driven primarily by higher volumes. Double-digit sales growth in the controls and household categories and mid-single-digit growth in repellents were partially offset by declines in cleaning. This year's weather trends have been more constructive than last year. Weather conditions for our controls products generally improved in key regions throughout the quarter, with improved temperatures and precipitation levels providing favorable weather conditions and driving foot traffic at our large retail partners. Retailers also allocated off-shelf and promotional space to our categories ahead of last year, helping drive sales volumes. Continuing this season's trend, we saw a strong correlation between POS and retailer orders, and we believe retail inventory levels are substantially back to normal. We are particularly pleased with the impact our increased brand building investments are having on our sales. Our Spectracide brand continued to increase sales ahead of category this quarter, gaining share and controls. Sales growth in household was led by our Hot Shot brand where Hot Shot is performing well in the household categories where we compete. Cutter area repellents led the sales growth in our pellets category. And e-commerce sales grew by mid-double digits and represent low double-digit percent of sales in the quarter and high single-digit percent of sales year-to-date. We are supporting this season's new products and innovations with increased media investments to drive top line growth. This quarter, the H&G business invested over 3x more in advertising than last year, communicating our product's superior value to results-driven consumers. We are supporting the season with full funnel advertising, activating TV, digital, social media and influencer investments to build both awareness of our products and their effectiveness and drive sales conversion. This approach has driven sales and category growth of our Spectracide products. And as we headed in the highest sales season for repellents, we will activate the same strategy for our cutter Eclipse

Okay. Thank you, Jeremy, and thanks, everybody, for joining us on today's call. Look, let's take a couple of minutes here to recap just a few of our key takeaways. And I think you can find these on Slide 19. Look, to sum it up, we had a good quarter. Our strategy of leaning into our strengths to fuel growth is working. We started the year planning to increase brand and innovation-focused investments by an incremental $40 million to $50 million. And the team started the year slowly, being judicious in their spend, making sure they were focused on getting the right strategies, making sure that the investments were going to get a return on them and be able to drive profitable top line growth. This quarter, the teams really jumped in, activating almost $23 million more in investments than last year. And our results are just the evidence the strategy is working. For us to spend $23 million more in advertising and innovation and still grow EBITDA this quarter, speaks to the quality of the earnings power of our company. We delivered top line growth driven by volume increases in each one of our businesses, and we fueled our sales momentum in e-commerce, where our teams have been focused a significant portion of the investments we've been making. While Home & Garden results were certainly helped by more favorable weather condition, healthier retail inventory levels and our investments were critical in helping us win it shelf and win with the consumer. And we took category share for our key brands and our products. Our Global Pet Care business continues its strong companion animal sales and our Home & Personal Care business had a record Prime Day in both North America and EMEA. These results could not be achieved without the right leadership and the right teams in the businesses and our operating teams. These results could also not be achieved without a healthy balance sheet. As I said in my opening remarks, we run a journey back to winning. And this quarter is just another mile marker on that journey. As I've been watching the Olympics, I'm sure all of you have over the past couple of weeks. I've truly been inspired by the journey some of these athletes have taken to get to the pinnacle of their careers. They've clearly got the right coaches, teams, resources, the opportunities and the determination to win. And if something doesn't go right during training, they make the necessary adjustments. We've been building up our teams. We've been upgrading our talent. We're leaning into resources, and we're starting to capitalize on the opportunities we have to win. We believe we have the right coaches, teams and the determination now. We will be making adjustments along the way to our continued winning journey. And while we're in the early stages, we are gaining momentum. Look, we do remain cautious about the things that we can control, like the uncertain geopolitical situation, the macroeconomic environment, rising ocean freight rates and the uncertainty of the consumer health. We'll continue to focus on controlling what we can control and staying as healthy as possible to be nimble and whether the headwinds that we'll face ahead. Our balance sheet is strong. Our operations are now efficient and performing. And we will continue to now invest in our brands and our people to drive growth. I'm excited about our continued momentum. At this time, I'd like to turn the call back over to Joanne. And we'll open the line up. And we'll take your questions. Joanne, back to you.

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

Certainly. And our first question comes from the line of Bob Labick from CJS Securities. Your question please?

Hi. Good morning. It's Pete Lucas for Bob. I guess, just talking about HPC, once that's separated, what's the heavy lifting that's left? Is there further portfolio optimization to be made in Pet or Home & Garden? And you had talked very briefly about some extensions to categories or adjacent categories. Is that a factor? And if so, where so?

Look, I think our bankers and our investors believe as I do, sale merger separation of the appliance unit will cause a, multiple uplift on our remaining company. And as I said in my opening remarks, we spent about five years here doing asset sales, but we paid off over $5 billion of debt. And we're the lowest levered credit in the space now. And we -- after getting the balance sheet fixed, we really turned our attention to get our operations right. We brought in a whole new team, built a new S&OP process got our fill rates up. And so we really feel like we're getting some operating momentum. Look, strategically, there was a transaction yesterday in the pet space that traded for 13x on a business that has a lot less scale than ours and half our EBITDA margin structure. So we continue to be perplexed as to why our shares trade where they do. We continue to believe they're materially undervalued, and that's why we continue to shrink the flow. But no, after we separate the HPC business through either a sale, merger or spin, we will look to grow organically and inorganically and build back scale. But we want to put some more wins on the board first.

Yeah. On the adjacency side, I think where you've seen us go over the last 18 months is really trying to expand on our strength in companion animal chose over to the trait side where we've been smaller. So we focused first on a cat treat launch. We've now recently launched some dog treats. In EMEA, we are in the food space with our IAMS and new Canova brand. We think there's opportunity in North America as well. That's a particularly for fresh wet food, that's a strong growth category really globally. We think there's opportunities for our brands to play in those spaces, too. So those are the areas we're focused on for the future.

And last one for me, just in terms of the increased marketing spend that you talked about. You talked about $23 million with the focus on Home & Garden. Can you kind of give us a little more detail in terms of the breakdown between Home & Garden and Pet, and the categories that it was focused on there and where you're looking to put it to work going forward?

I'll maybe let Jeremy take that. I'm not I'm not all super thrilled about breaking out every penny of spend and where it goes. But I can tell you what I'm proud of is to increase our advertising spend $23 million in a single quarter, and then be able to grow EBITDA $10 million on top of that, $10 million plus. I think that's something that investors should pay attention to. I think that shows real quality and strength of the earnings power of this company that we're putting back on the map here.

Yeah, I agree, David. Again, we won't -- we're not going to get into specific details because it's going to change quarter-to-quarter, H&G is a seasonal business. HPC has some seasonality. Also, it will be higher in quarters where we have significant new product launches. What I'll say for this quarter is that for H&G, it was probably getting close to half of the $23 million, followed by GPC Second. HPC, it was a little bit behind that. But I actually think you'll see that shift in the second half of the calendar year, where HPC heads into its stronger holiday season, will ramp up a little bit. And as H&G is in its lower seasonal selling season and we'll ramp that down a little bit. It will be fluid.

Great. Helpful. I'll jump back in queue.

Thank you. Thanks for your questions.

Thank you. And our next question comes from the line of Ian

Hi. I wanted to just touch on Pet a little bit here. It sounds like hardware is going back. Can you maybe tell us how hardware compared to consumables or vice versa, vis-a-vis. How they both did convert to each other? And maybe also when you talk about the online sales, kind of what categories and what's doing best online? Thanks.

I'll let Jeremy take the specifics. But I mean, listen, the durable side is still tough, but we had a good pond season in Europe and fish food and growing the filtration media. It's good business, replacement high-turn, consumables doing well. So that business was negative for a long time. And it's just nice to see aquatic stabilize despite continued pressure on the higher priced durable tanks, et cetera. And we continue to get kind of mid single-digit growth in our sweet spot, which is our cheese business. And so we're just going to continue to invest there. We're going to continue to drive growth. Definitely see the business migrating more towards e-commerce, and we've got a great team there that is investing heavily in digital advertising and content creation, and there's a lot more upside there. We want to get after it. But we see big time adjacencies. We believe we have the right to win. We have some big powerful brands like Good 'n' Fun. We believe good and tasty can get into Cat Treats and Dog Toppers and a lot of other adjacencies that are very big categories where we think we can be a player. So if we can move the needle on some of those things going into 2025-2026. I think we can have a pretty exciting pet story here. So that's the focus I'll turn it to Jeremy if I miss something or he wants to give more specifics.

Yes, I mean, not a lot to add. I mean, it's exciting to see the -- both this business and HPC at over 25% e-commerce year-to-date. I mean, that's obviously a trend that it's not going to reverse. The good news is we have really good capabilities -- globally commercially as well as operationally to fill from an e-commerce perspective. And our margins are relatively consistent across brick-and-mortar and e-commerce, which is another strength for us. I think naturally, the strength in e-commerce has really followed our normal category sizes. So think -- choose and now with up and coming treats as being the biggest category where you see consumers move to an online purchase, even a recurring purchase, a monthly delivery across our e-commerce retail partners, and that's business that we collectively love to see, and it's a great convenience for our consumers, and we hope to see it continue to grow.

Okay. Thank you. And then also just...

Did we get your question? Did we answer it?

Yes. No, perfect. And I just can ask one more on the M&A kind of adjacency front, is what are you thinking as far as adjacencies, just given kind of where we are on the macro side. How are you thinking about multiples in that space? And then how are you thinking about maybe integration risk as you guys are kind of humming along really nicely here now. Operations seem to be doing very well. Obviously, any type of M&A would maybe disturb that or maybe not to start that? How do you kind of think about all of those factors? Thanks.

I think the first thing to do is unlock a lot of value with appliances, right? And so that's the hot launch. And I think going forward, if you look at the amount of revenue we've sold off to pay down $5 billion of debt, we need to regain some scale. And we like the pet space and we like the home and garden space. And so we'll be active there. But you're 100% right. Our next deal has to be a slam dunk. It's got to be something in our wheelhouse. It's got to have hard synergies, and it's got to have growth, and we can't overpay for it. So we're just going to take our time. It's an election year. We see a lot of geopolitical risk. We see a lot of economic uncertainty. We don't feel like we need to run out and do anything right now. But there are a lot of assets being marketed. We are being targeted because everyone knows our balance sheet helps delever them. And so we're seeing tons and tons of acquisition opportunities, and we're going through them. But I don't have anything to report right now other than we are focused on maximizing the value outcome of appliances.

Okay. Thank you very much.

Thanks, Ian.

Thank you. And our next question comes from the line of Peter Grom from UBS. Your question, please.

Thanks operator. Good morning everyone. Two quick ones for me. Hey, Jeremy, how are you doing? So David, just on the HPC separation, it's more of a housekeeping. You mentioned an update at 4Q or before then. Are we to interpret that as we're going to have the final decision between now and say, mid-November as to how the separation occurs? Or is that just a broad-based comment? And then just second, I was hoping to just get some color on the implied 4Q guidance from the sales and EBITDA perspective, a little bit of a step down in terms of top line growth and margin progression maybe versus what we've seen. Can you maybe just unpack the drivers of that? Are you simply just being conservative just given the uncertainties out there? Or is there something that you're seeing quarter-to-date that's really driving that view? Thanks

Yes. Look, I'll take the first and I'll give Jeremy the second. Look, we've got multiple bids from financial players, strategic players on this appliance asset. And we've got a spin path. And so we just got to work through all those options and see where we come out. And I just can't comment on it any further than that. But let's see where we are. And you're right. I put in a press release that we'll update you on it by the fourth quarter, but it might be sooner, but that's where we are. There's a lot of interest in the asset.

Yes. And on the second question, Peter. So a couple of things. One, as I said earlier, what happens to us sequentially in our fiscal Q4 is that seasonally, HPC starts to ramp up and seasonally, Home & Garden starts to ramp down a bit. And that has a natural reduction in our sequential EBITDA margin on a blended basis because, as you know, Home & Garden is quite a bit higher from an EBITDA margin perspective in HPC. Nothing else really happening beer than that. And then what I would say on the top line, we held the top line flat for the year. We do still expect growth in the fourth quarter on the top line. However, we do expect it to moderate, which shouldn't surprise you because if you look at what happened last year from Q3 to Q4, we saw growth, particularly in Global Pet Care. So we're really not seeing much of a change sequentially. It's really about the comps to last year. And we feel it's the right number to put out there as we start the early part of the holiday season for HPC. And for Home & Garden, I think we're off to a good start in the fourth quarter. July was good, but weather will drive how long that season lasts at retail POS, which will impact how long we see retailer replenishment orders, and that's still something that has to develop over the next seven, eight weeks.

Awesome. Thank you both. I'll pass it on.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Chris Carey from Wells Fargo Securities. Your question, please.

Hey, good morning guys. I wanted to ask about free cash flow. Can you just characterize how you see about conversion so far this year? Perhaps some expectations in the near term. David, you mentioned building some inventory into Q4? And maybe just medium-term thoughts on kind of how cash conversion should be trending going forward? And then I have a follow-up.

I'll let Jeremy comment on it. I will tell you, look, we've had so much strategic activity, right? I mean if you go back to selling batteries and Auto Care and HHI, debt paydown. And then I wanted the balance sheet to be squeaky, squeaky clean as we fixed operations and so we got off all factoring programs, everything. I mean we're -- I'm just telling you, I mean, our earnings quality starting to get amazingly good. And our balance sheet is phenomenal. And I'm not just talking about our leverage ratios. I'm talking about how we manage payables, receivables, et cetera. We're really starting to run a best-in-class organization here, but that consumed a lot of cash paying back what in the past was, and every company does it. They factor receivables to get cash sooner, and I got off all that and we put a lot of money in that, put a lot of money into CapEx. But obviously, with materially paying down debt, I can tell you, as I look into '25, you're going to see a big drop in interest expense, we're going to do our best to manage taxes. We're going to continue to work tight on working cap. We're continually going to want to fund a dividend, but we keep shrinking the float and so that amount of money goes down. CapEx is CapEx, and then all the money I put into getting rid of factoring programs goes away. So I'll let Jeremy talk big picture, but you should see free cash flow get a lot better at this company as we get into fiscal '25.

Yes. I agree with everything that David said. I've been super pleased. I mean net cash from operating activity -- from continuing ops year-to-date is at $178 million before CapEx. And that is quite a bit higher than I expected as we started the year, really driven by working capital and EBITDA, frankly. In the first 3 quarters of the year, we unwound factoring to the 2 in circa, I think about $80 million, give or take. And in Q4, we have another $35 million to $40 million that will unwind. But despite that, the cash flow has been positive and good. So I feel really good heading into '25, certainly less really no unusual items that I can think of as I head into it. So I think it's going to be strong. I usually model free cash conversion for the business in the 40% to 50% range of EBITDA. I think that's a fair place to model, and we'll be more specific as we get to November.

Okay. On this step-up in inventory, just as you're preparing to execute on your sales initiatives, is that expected to have a noticeable impact on your margin profile as well? I think there was a comment about seeing some capability on inventory carrying costs in the quarter? And perhaps this is just flagging a dynamic as opposed to something that's overly material one way or the other?

Yeah. Good question. No, it's not going to have an impact on margins negatively. We are rightsized from a DC perspective. We're in a really good place, and we can certainly handle the incremental inventory that we mentioned in the prepared remarks. That's really about two things; it's about having the right and enough inventory for HPC to deliver on holiday sale needs into retail, which are, as I said earlier, sequentially, those demands go up; and then the other is the strength in e-commerce, it does have an impact on our need for a little bit more inventory, because, as you know, the consumer can have a much wider choice from a SKU perspective on e-commerce than they do in brick-and-mortar. And so over time, we're going to carry a little bit more inventory to service that, not noticeable to our DCs or operations. It's just really what we call out on working capital. And that's because as we've seen the blended fill rates in the mid 90s or even moving a little bit in the high 90s, especially at Home & Garden, what's underlying that is high, high 90% margins in brick -- or fill rates in brick-and-mortar and usually low 90s in e-com, because it's such a balance of filling that wider variety that consumers choose. And so this is really just about turning the dials to get even better from an S&OP perspective to get those fill rates to help drive growth higher as we move into 2025.

Yeah. Let me jump in. I mean, look, a couple of years ago, we had fill rates in the 60s, and our inventory was bloated. I mean, so all the big levers we've moved. I told you earlier, I mean we took almost $400 million out of inventory in this company. And so we've really cleaned that up. What we're talking about in Q4 is very marginal to -- just let me know we're going to add a little bit of inventory because we're trying to grow the business again, and top line growth requires a little bit of inventory. There's nothing to really read into that. But in other words, the magnitude, we have been still a ton of discipline, and we've done that, and that's behind us.

Okay. Thanks guys.

All right. Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Joanne Chomiak for any further remarks.

Thank you, Jonathan. And with that, we have reached the top of the hour, so we will conclude our conference call. Thank you, David and Jeremy. And on behalf of Spectrum Brands, thank you all for your participation.

Thanks, everybody. Have a good day, everyone.