Spectrum Brands Holdings, Inc. Q3 2025 earnings call

Thank you, and welcome to Spectrum Brands Holdings' Q3 2025 Earnings Conference Call and Webcast. I'm Joanne Chomiak, Senior Vice President of Tax & 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 two 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 three and four, 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 7th, 2025, 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. Our statement reflects our expectations regarding tariffs, which are based upon currently known and effective tariffs and do not reflect tariffs that have been announced and delayed, or other additional tariffs which could result in additional costs. 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?

Hey, thanks, Joanne. Good morning, everybody. Welcome to our third quarter earnings update. I want to thank everyone for joining us today. I'll start the call as usual with an update on kind of the global economic markets and their impact on our company. We'll then talk about Spectrum's operating performance and then our strategic initiatives. Jeremy, as usual, will then provide a more detailed financial and operational update, including a discussion on the more specific results of each business unit. If I could get you guys to turn to slide six now. When we spoke last quarter, the company had been hit with what I'm now calling the tariff torpedo. That really disrupted practically every aspect of how we do business around here. Operating when the costs of your products can more than double overnight is something we never really thought we'd experience.

Frankly, about 20% of our global cost of goods sold at the time was sourced from China for the U.S. market, and the cost of importing that product for sale to the U.S. consumer was suddenly so high we had to take very swift and, quite frankly, draconian actions to protect the company. I told you last quarter that we would control what we could control, we would be nimble, and we would protect the house. We were resolute in our conviction that we would not sacrifice the long-term health of our business for any sort of short-term gain. I was confident that we would get through the near-term volatility and emerge a stronger, more focused competitor in our space.

We knew that there would be short-term consequences to these decisions, but we also believed that doing the right thing for the long term would outweigh any sort of short-term gain. As I sit here today, 90 days later, I'm confident that we've made the right decisions. We took the challenges head-on. We felt the impacts on our results this quarter, but we're now already starting to see the benefits of making these difficult but correct decisions. Doing the difficult but right thing meant we had material supply issues in the third quarter. You'll recall that when U.S. tariff rates on Chinese-sourced products went to 145% and in some cases up to 170% earlier this year, we paused virtually all finished good purchases from China until such time the tariff levels declined to a place where we believe we could maintain profitability and margins. In mid-May, when the U.S.

tariff rate on Chinese imports dropped to 30%, only then did our businesses begin to strategically place orders again, and we only bought product where we knew we could price them for tariffs. Turning to the supply chain took time because we completely shut it off. We were negotiating supplier pricing concessions, we were prioritizing production runs, and we were making arrangements with ocean freight carriers. We genuinely have one of the best supply chain teams in the industry today, but even with them at the helm, we went up to eight weeks without any importation of product, and that left us out of stock on some of our main SKUs. Regular supply is now back on, but in this case, doing the right thing meant we had orders we simply couldn't fill in our Global Pet Care and Home & Personal Care businesses during the third quarter.

Some of that will continue into Q4 as well. Doing the difficult but right thing meant that we stopped shipping to some customers. When we faced material inflationary headwinds, our playbook is to cover our margin structure through a combination of supplier concessions, internal cost reductions, and yes, unfortunately, pricing. With each round of tariffs, we had to notify our customers that we will be increasing prices. No pricing negotiation with a retail customer is easy, but generally, we seek to be in a mutually agreeable place to arrive at a logical point given the inflationary headwinds. When these negotiations stall, we simply have no choice but to stop shipping to the customer and allow the negotiation to play out. We know that our products matter not only to our retailers but to our ultimate consumers, and we need to protect our bottom line, in part through pricing.

With all the tariff headwinds this year, and even with at the lower Chinese tariff levels, it simply wasn't practical for us to absorb all the cost of tariffs without increasing some prices. Unfortunately, some of our negotiations lasted much longer than others, which meant we had to stop shipping to certain customers while those negotiations were ongoing. In fact, in some of these cases, the customers were quite large, and they were our key customers, and the stop shipment lasted weeks. The good news is that we have now tariff-related pricing in place with practically all of our customers, and our sales levels are already improving. Again, doing the right thing to avoid massive long-term P&L hits meant we had to lose a significant amount of revenue in the third quarter.

Doing the difficult but right thing also meant we had to look internally, unfortunately, and we had to reduce our own costs. During the quarter, we executed a number of reduction-in-force activities that spanned across all the businesses and our corporate functions. We have either eliminated open positions or delayed their backfill. We had to adjust our investment spend to reflect the state of the business and the consumer environment. We've had to prioritize investments that would be the most impactful to both this year and into the future, given softer consumer demand in some of our categories. We also reduced discretionary and external spend, and we've been shrinking the real estate footprint of our company by rightsizing office spaces, warehouses, and distribution centers.

I'm very pleased that despite these tough decisions, these cost reduction activities that we engaged in and that we've implemented literally in the last 90 days, we now expect to reduce our costs by over $50 million in the fiscal year, fiscal 2025. That's a lot of work in a 90-day period of time. We also have been working hard to diversify the supplier base across the board. The teams are continuing to create diversified sourcing footprints for our global products, developing and activating non-Chinese sourcing alternatives. Our goal is to have the lowest all-in cost of supply for each of our markets. We expect that China will likely be the low-cost supply base for our international markets because of its cost advantages and its manufacturing efficiencies.

Now, for the U.S. market, sourcing outside of China, even there, may not always be the lowest cost option due to tariffs on other Asian countries. However, with the recently announced reciprocal tariffs and the trade agreement between the U.S. and China not finalized, it is possible that Chinese sourcing can still be the low-cost option. We have to be nimble. We're doing the work that provides us the highest level of flexibility to react to whatever the volatility there may be in the marketplace going forward. We are still working toward the targets we discussed during our last call, with GPC, our Global Pet Care company, having non-Chinese sourcing alternatives for the predominance of its purchases by this calendar year-end, and HPC continuing to build out its non-Chinese sourcing footprint throughout the remainder of fiscal 2025 and growing it in 2026.

However, the drop in Chinese tariff levels has provided some relief to these diversification efforts, and they're giving us a slightly longer timeframe in which to address it. If the relative tariff rates change, we will return to an accelerated path to exit China. Ensuring we have quality product, finding the right long-term solution for the company is the priority. With our initial rounds of pricing and supplier concessions, we have essentially eliminated our tariff exposure at the end of Q3. I'm very proud to make that statement. Based on the current known trade agreements between the U.S., the European Union, and other relevant countries that we source from, we are now targeting an incremental $20 million-$25 million worth of pricing and supplier concessions across the three businesses to fully cover what we believe will be the incremental exposure heading into fiscal 2026.

Our ability to do the difficult but right thing is enabled by our balance sheet, which is exceptionally strong, our strong free cash flow generation, the low leverage of the business, and our ample liquidity and extended debt maturities. These things are all enabling us to not only sustain ourselves but to enable us to strengthen our position in a volatile environment with quarterly sales that, quite frankly, were materially disrupted given the tariff activities of the last 90 days. We continually do the right thing for this company to set us up to enter 2026 on strong footing. It's really made us the partner of choice, too, for suppliers that are trying to build out new Southeast Asian factories. They know we're going to be here. They know we're going to give them orders.

They know they can count on us to pay them in time, on time, every time. We're going to continue to strive to do the right thing when it comes to protecting our balance sheets and our cash flows always. If I can now have everyone turn their attention to slide seven, I'll take you through the Q3 numbers. These numbers are materially distorted because of shutting off inputs from suppliers and then, quite frankly, shutting off sales to customers during pricing negotiations. Our net sales in Q3 did decline 10.2%. If we exclude some foreign currency benefit, organic sales decreased 11.1%. U.S. and European customers have been feeling macroeconomic pressure, quite frankly, from the global trade instability around the world. Customers have been stressed, and that's led to kind of overall category decline in both pet and the appliance businesses.

Thanks, David. Good morning, everyone. Let's turn to slide 12 and a review of Q3 results from continuing operations. We'll start with net sales, which declined 10.2%. Excluding the impact of $6.8 million of favorable foreign exchange, organic net sales decreased 11.1%, primarily driven by targeted stop shipments to certain retailers, supply constraints, and category softness in our Global Pet Care and Home & Personal Care businesses, as well as unfavorable weather in our Home & Garden business, with a cold and wet start to the season impacting the timing of replenishment orders. Gross profit decreased $38.7 million, and gross margins of 37.8% decreased 110 basis points, largely driven by lower volume, unfavorable mix, inflation, and higher tariffs, partially offset by pricing, impacts from cost improvement actions, and operational efficiencies, as well as favorable effects.

Operating expenses of $232.8 million decreased 8.7% due to lower investment spend in advertising and marketing and general expense management in light of the category softness and lower restructuring-related projects, partially offset by higher impairment charges in the quarter. Operating income of $31.3 million decreased by $16.4 million, driven by the gross margin decline, partially offset by the lower operating expenses I mentioned. GAAP net income and diluted earnings per share both increased, primarily driven by lower interest expense, reduced income tax expense, and lower share count, partially offset by lower operating income and lower investment income. Adjusted EBITDA was $76.6 million, a decrease of $29.7 million, driven by investment income of $12.7 million last year, lower volume, and reduced gross margins, partially offset by continued general expense management and lower investments in light of category softness. Excluding last year's investment income, adjusted EBITDA decreased $17 million.

Adjusted diluted EPS increased to $1.24, driven by reduced income tax expense, lower interest expense, and the reduction in shares outstanding, partially offset by lower adjusted EBITDA. Turning now to slide 13, Q3 interest expense from continuing operations of $8.4 million decreased $7.3 million due to our lower gross outstanding debt balance. Cash taxes during the quarter of $14 million increased $9.6 million from last year. Appreciation and amortization of $25.1 million was flat to last year, and separately, share-based compensation increased to $4.8 million from $4.5 million last year. Capital expenditures were $10 million in Q3, essentially flat to last year. Cash payments towards strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments were $8.6 million versus $10.5 million last year. Moving now to the balance sheet, we had a quarter-end cash balance of $122 million and $388.5 million available on our $500 million cash flow revolver.

Total debt outstanding was approximately $681 million, consisting of borrowings on our cash flow revolver of $103 million, $496 million of senior unsecured notes, and $82 million of finance leases. We ended the quarter with $559 million of net debt. Now let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results. We will start with Global Pet Care, which is on slide 14. Reported net sales decreased 9.6%, and excluding favorable foreign currency impacts, organic net sales decreased 11.4%. The primary driver of the sales decline was our decision to stop shipping to a handful of customers during tariff-related pricing negotiations. In the case of one key customer, the stop ship lasted a number of weeks.

By the end of the quarter, the pricing was in place, and we had resumed shipping to this retailer, although our shipments were below normal levels. In addition, sales were negatively impacted by tariff-related supply issues attributable to the period during which U.S. tariff rates on Chinese products were 145%, and we had paused importing Chinese-sourced products. Sales in the early part of our quarter were also negatively affected by capacity constraints at a large retailer, causing the retailer to slow purchases for a period of time. Those purchase patterns returned by the end of the quarter. These headwinds led to companion animals' organic net sales being down low double digits for the quarter. In addition, while we maintained our market share, the overall North American companion animal category declined in the low single digits.

We are pleased with the consumer reaction to our innovation and commercial activation, amplified by successful collaboration with key retailers that resulted in expanded distribution and improved shelf placement. In EMEA, organic net sales for our Good Boy brand increased, driven by successful range reviews in the U.K. and a very successful launch into Germany and Austria. Yet overall, companion animal sales were down low single digits, driven by weakening European consumer sentiment and a sales push into Q4 due to customer warehouse constraints. Organic net sales in Latin America grew low double digits, predominantly in the chews category. In aquatics, organic net sales declined in the low teens, with sales declining in each region. In North America, consumer demand remained soft, and sales were affected by the same pricing negotiation and weeks where we were not shipping to certain retailers.

Distribution gains at pet specialty offset some of that softness. In EMEA, market share increased nicely, however, sales were impacted by lower consumer demand and the timing of order fulfillment. GPC's new leaders are focused on commercializing innovation to engage our retailers and consumers. Our recently launched DreamBone CollaYUMS continue our focus on introducing innovation that offers health and wellness benefits for pets. CollaYUMS are the only chew on the market enriched with a type 2 collagen derived from chicken cartilage, benefiting hip and joint health while offering flavor that was liked by 100% of tested dogs. Good 'n Fun is gaining points of distribution, including in pet specialty, and we will be launching new innovation in Good 'n Tasty treats in the next few months. Our investments in Nature's Miracle are gaining momentum. Nature's Miracle has an extraordinarily high loyalty rate, driven by its best-in-class product performance.

Our investments and partnerships with retailers and influencers to increase consumer engagement, along with our recently launched delivery system featuring our patented Flip & Go technology to enhance user convenience and drive consumer engagement, is being well received by Nature's Miracle consumers. In dog and cat food, we went live with an Iams grain-free line of products and are expanding countries of distribution within EMEA. In aquatics, we are partnering with key retailers to feature our unique blowfish experience at the front of their stores, promoting the brand and its exciting innovation. This quarter's adjusted EBITDA of $44 million is $12.7 million lower than last year, and adjusted EBITDA margin was 17.2% compared to 20.1% last year. The reduction in adjusted EBITDA was primarily driven by lower sales volumes, unfavorable mix, and inflation, partially offset by operational productivity improvements, lower brand-focused investments, and effects.

Looking forward, we expect cautious consumer behavior in North America, but we remain optimistic about our performance in the category with some recent wins in product distribution and placement, together with a positive pace of sales and consumer acceptance to our innovation. European consumer demand in the pet categories is also feeling the effect of the global economic uncertainties, yet our Good Boy brand is performing well, and we have a promising innovation pipeline. We remain cautious about aquatics, where some U.S. retailers are reducing shelf space due to lower consumer demand and recent growth trends. We are overall excited about the pet category and believe these short-term headwinds will be behind us in the near term. As a reminder, our prior year's fourth quarter net sales were positively impacted by a non-repeating customer pull forward of approximately $10 million in purchases ahead of our SAP S/4HANA go-live last October.

Let's turn now to Home & Garden, which is on slide 15. Net sales decreased 10.3% in the quarter. The cold and wet start to the season delayed POS in our categories, negatively impacting retailer reorder patterns. Net sales in controls, our largest business, were down low single digits, while net sales in household pests, repellents, and cleaning were down double digits. While total category sales in each of our categories were lower this quarter, Spectracide gained market share, with Wasp and Hornet pest control sales well above category and comps improving with the weather conditions towards the end of the quarter. In fact, Spectracide is the only top five brand that grew across the controls category in the quarter from the data that we see. Hot Shot also outperformed the category this quarter, growing in every indoor segment in which we compete, driven by our new products and innovation.

Repel was the fastest growing repellent brand in the category, where sales in the food, drug, and dollar channel this quarter were especially strong, while cleaning sales comparisons continued to be affected by the loss of distribution in the prior year. As the weather improved in the last weeks of June, we saw both POS and retailer reorder patterns improve, and as we closed the quarter, retailer inventory levels were generally flat year-over-year. Our innovation continues to gain support from our retail partners and interest from consumers. The Spectracide One Shot product line, our higher performance, longest-lasting product, gained incremental off-shelf display support early in the season inside the home center channel, and combined with the continued advertising support, contributed to Spectracide's market share gains this season.

This year's innovation launch, the Spectracide Wasp, Hornet & Yellowjacket Trap, continues to gain momentum with consumers and support from all of our key accounts. POS performance is well above expectations, and we are in the process of increasing capacity for fiscal 2026. This product quickly gained penetration in the category, one of the highest of any new items in overall pest control. We also launched the new Hot Shot Flying Insect Trap this season, in line with our brand strategy of offering strong benefits and significant value to consumers. This innovation was voted Product of the Year for best in pest control. At a value price point to competitive products, the Hot Shot Flying Insect Trap provides continuous action to attract and capture house flies and fruit flies with a discreet, compact design that blends seamlessly into your home, with no setup or electricity required.

Hey, thanks, Jeremy, and thanks everybody again for joining us on the call today. Look, let's take a few minutes like I normally do, and let's just recap kind of the key takeaways of today's call. We can find that on slide 19. I concluded our last call by telling you I was confident we'd get through the near-term tariff-related volatility and emerge a stronger, more focused company and competitor. We really did make very swift, difficult, decisive decisions to protect our long-term financial health during Q3, and that's caused, I mean, Q3 is just, there's a lot of distortion in the numbers when you look at, you know, not importing product for months and then, you know, not shipping for weeks, but we didn't wait. We tackled this thing head-on and aggressively.

You know, we didn't wait to turn off supply from China when tariff rates on Chinese imports skyrocketed to 145% and higher. We didn't wait to notify retailers of reasonable tariff-related price increases, and we did not wait to stop shipping when negotiations stalled. We did not wait to develop dual sourcing plans to diversify our supplier base and to regularly reassess these plans to ensure we have the lowest cost sourcing options. We did not wait to take out fixed costs and discretionary spend. Like I said in my earlier comments, I mean, taking $50 million of costs out in 90 days, it was painful. It was a lot of work, but I'm really proud of the teams for just being proactive and getting it done. Thanks, everybody.

In a typical quarter, any one of those actions is a significant undertaking, and the team did all this in the third quarter. Look, we took hits in Q3. We took our medicine. We made some hard decisions, but that's behind us. Our focus is now on the future, and you know what? Q4 is off to a good start. We are seeing more normalized sales than Q3. We will have a little bit of supply constraint on some orders still in the fourth quarter, and that's lingering over from when we paused all the Chinese purchases, particularly in the appliance units, but those are going to be all behind us by the end of the fourth quarter. Consumer sentiment in the U.S.

and Europe is still a little soft, but we do see signs of improving macroeconomic conditions, and in fact, we expect consumer confidence will stabilize once this heightened geopolitical tension subsides. Weather trends have improved for Home & Garden. We expect to see continued strong POS levels into the fall, and we're excited about the fall crawl season that Javier and the team have going on currently. We know the hard work's not behind us, and we're not kidding ourselves. We expect that tomorrow will bring more changes and challenges, and we'll again have to make difficult but correct decisions. However, I'm highly confident that our team of 3,000 global employees will rally together, attack those challenges just like we attacked them this past quarter.

We're going to continue to lean into our competitive advantage as we take on these challenges, knowing our brands, leaders, teams, strong cash flows, and strong balance sheet are all there to support us. With the third quarter behind us and a very solid start to Q4, we are now full steam ahead to finish fiscal 2025 strong, and we're optimistic about setting up for a better 2026. At this time, I'm going to turn the call back to Joanne, and we're happy to take questions.

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