Spectrum Brands Holdings, Inc. Q4 2025 earnings call

Welcome to Spectrum Brands Holdings' Q4 2025 earnings conference call and webcast. I'm Jen Schultz, Division Vice President of FP&A and Investor Relations, 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 Faisal Qadir, 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 November 13th, 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 statements reflect our expectations regarding tariffs, which are based on currently known and effective tariffs and do not reflect tariffs that have been announced or 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?

Good morning. Thank you, Jen. Good morning, everyone. I want to welcome everybody to today's fourth quarter earnings update. I appreciate everybody taking the time to join us today. For today's call, I want to begin with a few big-picture opening remarks. First, I'm delighted and thankful to our teams for navigating a most difficult year. I am excited to let you all know that we believe that the worst of the tariff and economic disruptions to our businesses are now behind us. Secondly, we expect our two highest-value businesses, Global Pet Care and Home & Garden, to return to growth in 2026. Our adjusted free cash flow of $171 million, or approximately $7 per share, beat our own expectations in fiscal 2025, and our strong free cash flow generation will continue into fiscal 2026 and beyond.

Fourth, our balance sheet is strong with $124 million in cash at the end of the year, zero drawn on our revolver, and we ended the year with just 1.58 turns of net leverage after returning approximately $375 million to shareholders throughout the year through buybacks and dividends in fiscal 2025. Last, but certainly not least, we are hell-bent on improving the profitability and competitive positioning of our HBC appliance business, and as the headwinds dissipate, we are excited to work towards a strategic solution for this business once again. We are also highly confident that we are well-positioned within our industry to be the consolidator of choice within the pet and home and garden industries. As we wrap up a very challenging year, navigating through headwinds largely outside of our control, I again want to start this call by simply saying thanks.

Thanks to every one of our global team members for battling through tough times. Thank you to our vendors and retailers for your partnership in addressing the macroeconomic conditions that we collectively continue to face. Lastly, thank you to our investor base for your continued trust. I know this year has been tough, but I am proud of how we have proactively and decisively reacted to these outside forces, and I believe that actually it is creating a competitive advantage for us as we look forward to the future. If I could have everyone now turn your attention to slide six. During the year, we saw a significant decline in the macroeconomic environment, which impacted overall consumer sentiment, not just here in the U.S., but globally.

Trade policy uncertainty and volatility led to softening demand in the U.S. starting in the second quarter and impacted global markets more noticeably in the second half of fiscal 2025. When tariffs were at their highest point earlier this calendar year, we were looking at an annualized tariff exposure of approximately $450 million. This exposure is now approximately $70 million-$80 million on an annualized basis. The good news is, thanks to the diligence and the incredible efforts of our global supply chain team, we are extremely happy to report to you that we have offset substantially all of this exposure through a combination of vendor concessions, painful internal cost reductions, supply-based reconfiguration and diversification, and lastly, pricing actions.

I shared this with you last quarter that we had implemented a number of cost reduction initiatives that would result in over $50 million of savings in fiscal 2025. This included a reduction in force that spanned all three of our business lines and our corporate functions. While it's never easy to take these kinds of actions, we know that the impact has been tough on our employees. We also know, however, that it was necessary to right-size our cost structure and to protect the health of the businesses. We have also made significant progress in diversifying our supply chain to increase both its resiliency and its flexibility. Heading into fiscal 2025, we had approximately $300 million of source product coming into the U.S. from China. We have since reduced these Chinese source products to the U.S. markets by nearly 50%.

Further diversification will remain a priority for us going forward, and we expect to only have approximately $15 million to maybe $20 million of direct spend in China for our two most highly valued businesses, Global Pet Care and Home & Garden, by the end of fiscal 2026. We will also continue to move product out of China within our Home & Personal Care businesses when it is the right financial decision to do so and when it does not sacrifice the standards that we have for our quality. I would also like to take the opportunity now to thank our agile global supply chain team who have worked tirelessly to navigate this volatile environment and to make sure that our supply chain going forward is much more resilient and flexible to whatever challenges may arise.

Earlier in the year, I emphasized that with all of this uncertainty, we would control what we could control. One of the priorities when we pivoted our operating strategy was to maximize cash flow generation and deliver to you over $160 million of free cash flow in fiscal 2025. In fact, we over-delivered this number. We delivered $170+ million in free cash flow through disciplined CapEx management and better working capital improvements. We ended the year with net leverage of 1.58 times, well below the stated goal of 2-2.5, all while continuing to reward our shareholders with approximately $375 million of capital returns split between share repurchases and dividends in fiscal 2025.

During just the recently completed fourth quarter, we repurchased an additional 700,000 shares of stock, and we continue buying during our pre-earnings quiet period through a 10B5-1 plan put in place in June, later, which was amended by our board in September to increase the cap on that to $100 million. In fiscal 2025, we repurchased approximately 4.4 million shares for roughly $326 million. Since the close of the fiscal year, we have purchased approximately 0.4 million shares for roughly $21.5 million in total. Since the close of the HHI transaction, we have returned over $1.37 billion of capital to our shareholders through our various share repurchase programs and reduced our share count by approximately 44% since the close of that deal. If I can now have everyone turn to slide seven, I'll give you a quick overview of fiscal 2025 results.

As I mentioned earlier, it was a challenging year for the businesses, and we were faced with a variety of external headwinds. The volatile trade policy landscape not only impacted consumer demand, but it also led to a temporary pause in shipments from China into our U.S. businesses when the tariffs were at their highest point. In fact, we paused all incoming and inbound traffic from China for about six to eight weeks, and that impacted our ability to fill orders throughout the second half of the fiscal year. Overall, fiscal 2025 net sales declined 5.2% compared with fiscal 2024, and this was after actually starting the year off with top-line growth, as you remember, in the first quarter of 2025.

While our fourth quarter net sales also declined by 5%, we're actually encouraged that consumer demand was stabilizing throughout the quarter in our key markets and our categories as trade policy has become a little less volatile, and the supply shortages we experienced in the second half of the year are now behind us, largely behind us, I should say. We have been relentless in addressing the top-line declines by initiating further cost reduction initiatives and cost savings. In addition to the fixed cost reductions with the elimination of permanent salary headcount, we have also been reducing selectively our advertising and marketing spend in light of category softness, and we have significantly reduced our office and distribution footprint as well. All these actions are mitigating some of the EBITDA declines from the various macroeconomic headwinds.

If we can now look to slide eight and focus now on our strategic priorities for this upcoming year, fiscal 2026. The fundamentals of our business are actually strong, and I'm confident the decisions we've made over the last six to nine months actually make us a stronger, more focused business. That brings me to the first key element of our strategic focus. We will continue to be good financial stewards of the businesses as we navigate the current macroeconomic landscape. The actions we took in fiscal 2025, while difficult, they were quite necessary to address the external headwinds we were faced with. With that said, the hard work is not over. We have to continue to be diligent, and we actually need to be more efficient with our spending and investing profile.

We need to demand, and we will demand, better returns on our investments while continuing to reduce the overall complexity of our businesses. The teams are now focused on fewer, bigger, better initiatives to maximize the impact of our investments. As you've heard me say before, we believe that the strength of our balance sheet sets us apart from our peers. We will continue to remain disciplined in managing working capital while at the same time maintaining high fill rates supported by our best-in-class supply chain team. The second element here is continued focus on operational excellence by leveraging technological advances that we're building for the future. As you know, we've been on a multi-year journey to upgrade and implement the new ERP system, SAP's S/4HANA.

Thank you, David. Turning to slide 11, and a review of our Q4 results from continuing operations, beginning with our net sales. Net sales decreased 5.2%, excluding the impact of $10.5 million of favorable foreign exchange. Organic net sales decreased 6.6%, primarily driven by supply constraints as a result of our decision to pause purchases from China for the U.S. market during the third quarter and continued category softness in our Global Pet Care and Home & Personal Care business. These headwinds were partially offset by a delayed start to the season for our Home & Garden business that benefited current quarter results. Gross profit decreased $31.4 million, and gross margins of 35% decreased 220 basis points, largely driven by lower volume, unfavorable mix, inflation, and higher tariffs, partially offset by pricing, cost improvement actions, and favorable FX.

Operating expenses of just over $227 million decreased 14.6% due to lower spend in advertising and marketing and general expense management in light of category softness, as well as lower restructuring-related project spend. Operating income of $29.4 million increased by $7.5 million due to the lower operating expenses, partially offset by a decline in gross profit. GAAP net income and diluted earnings per share both increased, primarily driven by a one-time tax benefit for the quarter resulting from a tax entity realignment initiative, lower share count, and higher operating income. Adjusted EBITDA was $63.4 million, a decrease of $5.5 million driven by lower volume and reduced gross margins, partially offset by lower operating expenses. Adjusted diluted EPS increased to $2.61, driven by a one-time tax benefit that I referenced earlier, and the reduction in shares outstanding, partially offset by lower adjusted EBITDA.

Turning to slide 12, Q4 interest expense from continuing operations of $7.9 million increased $1.2 million due to higher average borrowing on our cash flow revolver in the current quarter. Cash taxes during the quarter decreased $10.2 million from the prior year. Depreciation and amortization of $23.9 million decreased $1.7 million from last year. Separately, share-based compensation increased to $5.8 million from $4.6 million in the prior year. Capital expenditures were $13.2 million in Q4, essentially flat to last year. Cash payment towards strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments were $7.3 million versus $10 million last year. Moving to the balance sheet, we had a quarter-end cash balance of $123.6 million and $492.3 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $581.4 million, consisting of $496 million of senior unsecured notes and $85.3 million of finance leases.

We ended the quarter with $457.8 million of net debt. Turning to slide 13 and an overview of our full year results, net sales decreased 5.2% and organic net sales decreased 5.3%. The sales performance was driven by category softness in light of macroeconomic conditions and supply shortages from the six- to eight-week pause previously mentioned. These had significantly impacted results both in our Global Pet Care and Home & Personal Care businesses. Despite strong performance by our key brands, sales in Home & Garden business were modestly down, driven by unfavorable weather conditions. Full year gross profit decreased by $77.4 million and gross margin of 36.7% decreased 70 basis points, driven by lower volume, higher inflation, increased tariff costs, and unfavorable mix. This was partially offset by cost improvement initiatives, pricing, and favorable FX.

Adjusted EBITDA decreased to $289.1 million, excluding investment income of $52.7 million in the prior year. Adjusted EBITDA decreased $30 million or 9.4%, primarily driven by lower volume and a decline in gross profit, partially offset by a reduction in operating expenses. Adjusted free cash flow was $170.7 million or approximately $7 per share, exceeding the $160 million free cash flow framework previously provided. During the year, we prioritized the health of our balance sheet through active management of CapEx investments and improved working capital. Now let's get into a review of each business unit where I'll provide you more details on the underlying performance drivers of our operational results. I'll start with our Global Pet Care business, which is slide 14. Reported net sales decreased 1.5%, and excluding favorable foreign currency impact, organic net sales decreased 3.3%.

Sales in aquatics increased high single digits, offset by mid-single digits decline in companion animals. In North America, our companion animal brands continue to trend favorably. Our brands maintained or gained market share driven by innovation and successful commercial activations with our retail partners in spite of category softness. In aquatics, we successfully mitigated category declines and delivered improved results, driven by distribution gains in pet specialty and mass channel. Comparisons for the quarter in both companion animal and aquatics were impacted by a strategic pull forward of orders by retailers in the prior year in preparation for our S/4HANA ERP implementation, resulting in an approximately $10 million headwind for the quarter. Also, as expected, our decisions to pause shipments for a six- to eight-week period when tariffs were at their highest point during the third quarter led to continued supply shortages during the current quarter.

Our inventory levels are now generally healthy, and shortages are not expected to be a significant headwind heading into fiscal 2026. Conversely, results were favorable, impacted by our decisions in the third quarter to stop shipment to a key retailer as tariff pricing negotiations stalled. By the end of the third quarter, negotiations were complete, but it did result in shipment delays benefiting our fourth quarter results. In EMEA, companion animal sales increased, driven by the continued strength of our Good Boy brand, market share gains in the U.K., and expanding further in continental Europe. Net sales also increased in our dog and cat food, led by our Eukanuba brand. Aquatic sales also increased with the Tetra brand gaining shares in key markets, mitigating category softness. Our innovation continues to resonate with the consumer and is largely focused on further expansion into adjacent categories.

You may recall we recently launched Greenies Collagen, a product that focuses on health and wellness benefits for pets. We also continue to launch new innovations in the treats categories as our Good Boy and Tasty product launches continue to perform well, with further plans of expansion and more unique innovations coming in the coming months. Our investments in Nature's Miracle also continue to yield results as the brand is gaining share and new points of distribution. In the fourth quarter, Nature's Miracle grew across PurePlay Online, Mass, Food, Dollar, and Drug channels. Our Good Boy brand is the number one brand in dog chews in the U.K. and is the fourth largest brand in overall pet and continues to grow market share, driven by consistent innovation. The brand's expansion across Continental Europe continues to perform really well, most recently becoming one of the top five treat brands in the Netherlands.

In dog and cat food, we are continuing to expand IAMs into more markets and recently launched a refreshed portfolio on Eukanuba. This quarter's adjusted EBITDA of $49.6 million is $5.3 million higher than the previous year. An adjusted EBITDA margin was 16.6% compared to 14.6% last year. The improvement to adjusted EBITDA was primarily driven by expense management through cost savings initiatives announced earlier in the year, lower investment spend due to category softness, and pricing. These actions more than offset the lower sales volume, higher tariff costs, and inflation experienced in the quarter. While GPC's fiscal 2025 sales fell short of the prior year due to macroeconomic and category headwinds, we believe the business is well positioned heading into fiscal 2026, and we expect to return to modest growth as underlying category fundamentals and macroeconomic trends begin to stabilize.

With generally healthy levels of inventory, we continue to be optimistic about our performance in the category. With the recent wins in product distribution and placement, together with the positive pace of sales and consumer acceptance of our innovation, we believe we will continue to outperform the category. While consumers continue to be challenged, we are encouraged by the overall resilience and strengths of our brands. I'll now move to our Home & Garden business, which is on slide 15. Net sales increased 3.2% in the quarter, reflecting a delayed start to the season that pushed volume from the third quarter into the fourth quarter. While July experienced favorable weather conditions, leading to an improved POS and strong retailer reorder patterns, unfavorable weather conditions across key regions in the latter half of the quarter negatively impacted POS and shipments.

Net sales and controls, which is our largest category in Home & Garden, were up high teens as SpectraSight continues to outperform the category, with a strong finish to the quarter in home insect control and herbicides. In household pet, Hot Shot also gained share with the positive POS, while the overall category was flat. We are particularly pleased with the recent innovation launch of our Flying Insect Traps that continues to outperform the rest of the category. Repellent sales were down mid-single digits, with softness at key retailers driven by unfavorable weather conditions. Net sales and cleaning were also down for the quarter. As weather patterns evolve and shift POS into the fall, our late-season program continued to gain incremental support from our key account partners, with activations for the quarter at four times the number of stores as compared to last year.

Our big bet innovations are gaining support from our retailers and resonating with consumers, exceeding our expectations. This year's innovation launch, the Spectracide Wasp Hornet and Yellowjacket Trap, was a hit with consumers and quickly gained penetration within the category, earning one of the highest penetrations of any new item in overall pest control. POS performance was above expectations, with additional plans to expand distribution and capacity heading into fiscal 2026. The Hot Shot Flying Insect Trap launch also performed very well with its strong value proposition. We are excited to see expanded distribution on this new product as well in fiscal 2026. Adjusted EBITDA was $16.9 million compared to $19 million last year, and the adjusted EBITDA margin was 12.1%, 200 basis points lower than the prior year.

Okay, thanks, Faisal. Let's look at slide 19. Thanks, everybody, for joining us today on the call. Again, I'll take a few minutes just to recap the key takeaways and findings on slide 20. Fourth quarter financial results concluded a very challenging year for us. We took decisive actions, as I've mentioned. They were necessary to protect the company and the balance sheet, but it did have short-term impacts on the P&L, and that's reflected in the numbers we reported today. We will continue to be good stewards of the businesses going forward. We will be disciplined in our actions while utilizing a strong balance sheet. As you know, earlier in the year, with all the macroeconomic uncertainty, we made the strategic pivot and started running this business to maximize free cash flow. I'm proud that this decision paid off.

We were able to deliver over $170 million, or roughly $7 per share in free cash flow, to our investors. These actions are now embedded, quite frankly, in our DNA, and we're going to continue to focus on this going forward. We're really excited to report, quite frankly, that both the Global Pet Care and Home & Garden businesses, which are our two most highly valued businesses, they're going to return. We're expecting them to return to growth in fiscal 2026. We're excited about that. We believe in the categories, and we believe in our teams in these businesses. Our new product development pipeline is strong, and we're going to continue to focus on launching fewer, bigger, better initiatives for successful commercialization as we move this company forward. I also continue to be optimistic about the evolving M&A landscape.

We expect additional assets to become available at better price points. With that said, we will remain disciplined in our process as we look for highly synergistic assets while being mindful of maintaining our lower leverage. We are confident that despite the current headwinds, that are largely outside of our control, we are a stronger, more focused company as we move the business forward in its strategic transformation. We will continue to be good stewards of this appliance business, focused on overall profitability improvement as we navigate a challenging environment, and we remain committed to finding a strategic solution for this asset. As trade policy stabilizes and consumer sentiment improves, we believe synergistic growth opportunities are on the horizon with a higher probability of consolidations in this space, which we believe, frankly, is long overdue.

We are committed to executing on our operational goals, delivering improved business performance, and driving value to our stakeholders. Again, I think the good news today with today's call, we believe that the worst of the tariff and economic disruptions to our business are behind us. We expect our two highest valued businesses, Global Pet Care and Global Home & Garden, to return to growth in fiscal 2026. We're going to continue generating a lot of free cash flow as we go forward. The balance sheet is strong, and we're going to continue returning lots of capital to shareholders through buybacks and dividends as we move this business forward. I'll turn the call back over to Jen, and we'll be very happy to take your questions.

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