Spectrum Brands Holdings, Inc. Q2 2026 earnings call

Thank you, and welcome to Spectrum Brands Holdings Q2 2026 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 May 7th, 2026, 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 slide presentation, 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, Jen. Good morning, everybody. We wanna welcome you here to our second quarter earnings update. We thank you and appreciate you joining us this morning. I'll kick the call off today with an update of the operating environment that we find ourselves in. I'll tell you about our operating performance. Then we'll hit our strategic initiatives. Faisal will then provide a more detailed financial and operational update, including a discussion on the specific business unit results. If I could have everybody turn their attention to slide six, I think on the investor deck. Let me start today's call by saying that I'm pleased to be here, reporting another strong quarter for Spectrum Brands. Once again, our quarterly results outperformed expectations both on the top and bottom lines.

This is a direct testament to the effectiveness of our strategy and frankly, the dedication of our team. It's quite gratifying for me to see our disciplined approach and focused execution translating into our financial results in such a meaningful way. I am pleased to also report that in the second quarter, both of our reported net sales and adjusted EBITDA increased year-over-year, with net sales increasing 4.9% and adjusted EBITDA growing by an impressive 17.8%. This is a significant milestone for our company as it marks our return to growth for the first time since the first quarter of 2025 prior to the trade policy changes and the overall deterioration in global macroeconomic conditions.

We continue to see signs of stabilization within the broader markets that we serve with a generally resilient consumer despite the dynamic environment, except for some expected consumer demand softness in our Home & Personal Care business. As we look ahead to the balance of the year, we're quite pleased with the overall improving conditions. We're also cautious about the resilience of the consumer, and we will remain vigilant as we run the business going forward, given recent geopolitical tensions, most notably with the recent conflict in the Middle East, increasing global fuel prices, and the potential for more volatility that we expect in U.S. trade policy this summer. On the cost side, we're also mindful of the ongoing challenges and volatility created by the broader macroeconomic landscape.

Since our last quarterly update, geopolitical tensions have escalated. This has resulted in some modest inflationary cost pressures, particularly across some of our commodities and our freight spend. At this time, we do not view this as a significant headwind for the balance of this year. We would expect to largely offset it with recent changes to U.S. trade policy. We will continue to monitor all these developments closely, as we have demonstrated in the past. We will proactively address cost pressures as they arise to ensure our overall profitability. If I could turn your attention back to the 2nd quarter, we made focused investments in our key businesses. We returned to growth, all the while maintaining a strong balance sheet position.

We continue to exercise discipline by optimizing working capital and keeping our net leverage low while also returning capital to our shareholders. We ended the quarter with approximately $125 million in cash. Less than $30 million drawn on our revolver, and our net leverage ratio stood at 1.66 turns, well below the long-term target we've set for the company of 2-2.5 turns. We did repurchase about 100,000 shares in the quarter for about $6.8 million. Since the close of the HHI transaction, we've returned over $1.4 billion of capital to our shareholders through our various share repurchase programs, and we've actually repurchased almost 45% of the entire share count of the company since the closing of that transaction.

We additionally have over $300 million remaining of board-authorized share repurchase programs left. We will, however, be judicious going forward on share repurchases to ensure flexibility as we look to capitalize on market opportunities. We'll talk more about that later. On the strategic front, as we disclosed in our recent 8-K filing Monday of this week, we've entered into an agreement with Oaktree Capital Management to form a strategic partnership in our HPC business. My relationship with Oaktree spans over 20 years. I'm excited to be partnering with a firm with a proven track record of taking businesses similar to HPC and optimizing them for standalone success. Under the terms of the agreement, Oaktree will make a $127 million investment in the HPC business, consisting of $67 million of preferred equity and the balance in the form of a term loan.

Their investment implies a valuation for the HPC business of approximately 6x LTM EBITDA as of Q1 fiscal 2026. Importantly, it is non-recourse to Spectrum Brands Holdings. This transaction represents a meaningful step forward in Spectrum Brands and in our previously communicated strategy to separate HPC from our other business units. For the HPC business, this investment actually accomplishes several goals. It reaffirms our vision for the future of the business through this investment from a sophisticated counterparty. It establishes a separate dedicated platform for HPC to maximize focus and growth potential. Three, it creates optionality for HPC to become the strategic partner of choice for the industry. That's whether through a sale, M&A, or a spin-off. We are excited about our partnership with Oaktree. We now have a well-capitalized standalone vehicle to maximize shareholder value.

If we can turn now to slide seven, I'd like to update you on our strategic priorities for fiscal 2026. These priorities continue to serve as a guide in our decision-making. I'd like to share our progress on each of them individually. First, if we can start with financial stewardship, I'd like to build upon what I shared earlier in regards to balance sheet health. A big part of that health is centered around disciplined inventory management, which has been a focus of ours for the last couple of years. We now have a best-in-class S&OP process. It's yielding results and ensuring that we have the right level and mix of inventory on hand. This isn't just my opinion.

Exhibit A, we ended second quarter with inventory actually $50 million lower than the prior year, and we still delivered fill rates well above 95% across all businesses. We're demonstrating disciplined inventory execution without compromising service levels. This is an excellent demonstration of efficiency, and I'm extremely proud of the team for their continued diligence in driving working capital efficiency while constantly and consistently meeting customer demand. Second, if I can move to operational excellence, we continue to make steady progress on our S/4HANA transformation, which remains a foundational element of the long-term strategy here. We recently implemented S/4 on our Global Pet Care EMEA business, marking the first major international deployment of our new ERP transformation. With this milestone, over 95% of our combined Global Pet Care and Home & Garden businesses are now operating on a unified ERP platform.

While learnings from this deployment are informing how we operate today, our primary focus is on completing the remaining implementations, most notably within the HPC business, to further standardize processes, strengthen controls, and support scalable growth over time. As we continue to advance this project, the platform is expected to further enhance productivity, support better and faster decision-making, and reinforce our ability to scale the businesses over the long term. We also remain committed to our Fewer, Bigger, Better strategy for our brand investments. This is enabling us to focus resources on higher impact initiatives while maximizing returns. This disciplined approach has driven share gains in several key categories and has strengthened our engagement with consumers. Later in the call, Faisal will share more details on our innovation pipeline and how it's fueling our growth across the portfolio.

This now brings me to our third key priority, which is investing in our people. I often tell the team that winning is simply more fun, and I think it's a philosophy the team is starting to really embrace. Achieving our goals and delivering results consistently creates a positive and energizing environment where everyone feels valued and motivated. Success not only boosts morale, but it fosters a culture of collaboration, innovation, and continuous improvement. Over the past year, our company has faced significant challenges, and we've had to make some really tough decisions. Yet our team's resilience has been remarkable. We are committed to providing the resources, training, and support that our employees need to thrive because we know that when our team is winning, our business and our stakeholders win as well.

Lastly, the fourth priority for fiscal 2026 is centered around our strategic transformation. We are encouraged by the strong results in both our Global Pet Care and our Home & Garden businesses, with our key brands in both businesses delivering above-market sales growth. Our team's focus on consumers' needs, supported by our data-driven strategy, continues to generate positive results. Beyond organic growth, we continue to remain optimistic about M&A opportunities in both segments. We are committed to a disciplined process in evaluating acquisition targets and believe we are well-positioned to be the consolidator of choice in both pet and the Home & Garden categories.

Thank you, David. Let's turn to slide 10 and review our second quarter results from continuing operations, beginning with net sales. Net sales increased 4.9%, excluding the impact of $22.9 million of favorable foreign exchange. Organic net sales increased 1.5%, primarily driven by strong performance within our Global Pet Care and Home & Garden businesses. In addition to external factors such as the weather and accelerated retailer ordering that favorably impacted our results, our key brands in both businesses continued to perform well and gain market share. As expected, our Home & Personal Care business continues to experience soft consumer demand across both North America and Europe.

Gross profits increased $16.9 million. Gross margin of 38.1% increased 60 basis points, largely driven by pricing, cost improvement actions, and favorable FX, partially offset by higher trade spend and higher tariff costs. Operating expenses of $226.8 million decreased by 3% due to a trade name impairment recognized in the prior year and lower investment spend, partially offset by additional restructuring and strategic transaction expenses and unfavorable FX. Operating income of $43.5 million increased by $24 million, driven by the gross profit increase and lower operating expense I mentioned earlier. GAAP net income and diluted earnings per share both increased, primarily driven by the higher operating income. Diluted earnings per share also benefited from a lower share count.

Adjusted EBITDA was $84 million, an increase of $12.7 million, driven by the improved gross margins. Adjusted diluted EPS increased to $1.25, driven by the higher adjusted EBITDA and a reduction in shares outstanding. Let's turn to slide 11. Q2 interest expense from continuing operations of $7.3 million decreased $200,000. Cash taxes during the quarter of $10.6 million decreased $13.3 million from the prior year. Depreciation and amortization of $24.2 million decreased $300,000 from last year. Separately, share-based compensation increased to $6 million from $5.2 million in the prior year. Capital expenditures were $9.3 million in Q2, about $100,000 higher than last year.

Cash payment to our strategic transaction, restructuring-related projects, and other unusual non-recurring adjustments were $5.3 million versus $6.4 million last year. Moving to the balance sheet, we had a quarter-end cash balance of $125.1 million and $470.8 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $599.7 million, consisting of $496.1 million of senior unsecured notes and $79.6 million of finance leases. We ended the quarter with $474.6 million of net debt. Let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results. I'll start with our Global Pet Care business, which is slide 12.

Reported net sales increased 11.2%. Excluding favorable foreign exchange, organic net sales increased 7.6%. Reported net sales in companion animal increased low double digits, while sales in aquatics increased mid-single digits. In North America, sales increased mid-single digits, primarily driven by strength in companion animal, where our key brands continue to outperform the market. Good 'n' Fun, DreamBone, Nature's Miracle, and FURminator all posted positive POS for the quarter in categories that were flat or slightly down versus the prior year. Sales performance in the e-commerce channel was particularly strong, achieving double-digit growth this quarter. It is important to note that this result includes an acceleration of approximately $3 million in sales that were originally anticipated to be in the third quarter.

Excluding this timing impact, underlying growth in the e-commerce channel remains robust, reflecting continued strong demand and effective execution of our digital strategy. Our quarterly sales results also benefited from the cost-related pricing actions taken during the last fiscal year. Organic sales in EMEA increased in the high single digits with strengths across both companion animal and aquatics. In companion animals, Good Boy is outperforming the competition across major European markets, fueled by expanded distribution in continental Europe and sustained leadership in the U.K. Aquatics growth was driven by market share gains in our globally leading Tetra brand, which is celebrating its 75th year of providing innovative products for consumers' aquatic care needs. In addition, on March 30th, the GPC EMEA business went live on the SAP S/4HANA platform.

In anticipation of the transition, which included ordering and shipping blackout periods during the days leading up to and immediately after go-live, GPC partnered with our retail customers to accelerate certain purchases into the period before implementation to ensure the retailers had adequate supply. This accelerated approximately $6 million of sales into our second quarter results. On the commercial side, our innovation and associated marketing and advertising support are driving incremental growth. As pet owners increasingly focus on health and wellness of their pets, our DreamBone CollaYUMS dog chews, enriched with type 2 collagen for joint health, stands out as a top choice in the market and is driving incremental sales volume for the business.

Within stain and odor, Nature's Miracle continues to outperform the market, driving growth in a declining category, in part fueled by our innovative product design with ready-to-use packaging and incremental sales growth in our cat cleaning products. Our Good Boy brand, the number one brand in dog chews in the U.K., is gaining market share through consistent innovation. Outside of the U.K., the expansion of Good Boy across continental Europe continues to be a priority and has garnered strong support from our retail partners with expanded distribution. We continue to support our brands through targeted marketing and advertising investments that are generating positive POS results across key retail partners. Based on consumer research and market insights, we are in the process of refining our price pack architecture across the portfolio.

This initiative is intended to reinforce category health and support sustainable long-term growth by improving value clarity, simplifying consumer choice, and ensuring appropriate reinvestment in our brands and innovation pipeline. This quarter's adjusted EBITDA for our GPC business of $56.8 million is $6.8 million higher than the previous year, and adjusted EBITDA margin was 19% compared to 18.6% last year. The increase in adjusted EBITDA was primarily driven by higher sales volume, pricing, and cost improvement actions, partially offset by higher tariff costs and additional trade and investment spend. Our strong first half positions us well as we enter the balance of our fiscal year, and we are on track to deliver top-line growth for fiscal 2026 in the GPC business.

Our year-to-date results demonstrate that our strategy is working, and we expect to build on our momentum in the second half of the year through strong innovation and brand activations. As a result, marketing and advertising expenses are projected to sequentially increase during the second half of the year, with the highest spending anticipated in the third quarter. Also, as a reminder, in fiscal 2025, our results were impacted by targeted stop shipments with certain retailers during tariff-related pricing negotiations, creating an artificial shift in order between the third and fourth quarter of last year. Now let's move to our Home & Garden business, which is on slide 13. Net sales increased 11.3% in the quarter, primarily driven by double-digit growth in the controls category, reflecting strong consumer demand for our pest control and herbicide solutions.

Favorable weather trends, highlighted by the warmest March on record in the U.S., led to a strong start to the season with higher retail point of sale activity. Retailer reorder patterns for the quarter also reinforce our view that retailers started to see the season with appropriate levels of inventory to support incremental year-on-year sales execution, particularly in the controls category. This positions us well to capture ongoing demand as the season progresses. In addition to these external factors, our brands continue to win versus competition in the market, with share gains in Spectracide, Hot Shot, Cutter, and Repel. This quarter's results demonstrate the effectiveness of our commercial strategy, and we will continue to prioritize innovation and 360-degree marketing support. Under our Spectracide brand, we recently introduced a new liquid fertilizer innovation platform, providing an easy and affordable solution in lawn care.

The two-in-one formula provides both a quick release for a fast green lawn and a slow release for long-lasting color. Distribution was secured at several retailers, including off-shelf, off-shelf displays driving further penetration. Consumer response has been strong. The product was recently recognized as the 2026 Product of the Year in the lawn fertilizer category. In repellent, Cutter, our area insect repellent brand, is performing well and gaining market share with expanded product offerings and advantageous off-shelf placement. To further support our brands, we have successfully secured expanded display presence across key retail locations, ensuring our innovative products are highly visible and accessible to consumers throughout the peak season.

Thanks, Faisal. Thank you, everybody, for joining us on the call today. Let's take a few minutes and just recap key takeaways. I think that's on slide 18. I'd like to start by highlighting the first half performance, actually. Despite a dynamic and challenging environment, we delivered solid results, underscored by a return to year-over-year growth in the second quarter. Net sales increased 4.9%, and adjusted EBITDA grew nearly 18%, reflecting disciplined execution across the company. Our ongoing momentum in Global Pet Care and Home & Garden is evident, with consistent share gains across our portfolio. This underscores the effectiveness of our innovation strategy as we continue to support with targeted investments.

In Home & Personal Care, the top line did decline, and that was driven by continued consumer softness across the U.S. and EMEA, which was anticipated and in line with our expectations. Despite HPC's lower net sales, adjusted EBITDA actually improved modestly as we remain focused on maximizing the profitability of the business. As we look forward to the second half of the year, the focus is clear for us. We are mindful of the evolving macroeconomic environment and continued pockets of consumer softness. Our priorities and strategic focus remain unchanged, and we are firmly centered on execution and financial discipline. We will continue to monitor closely inflationary pressures and geopolitical uncertainties and are prepared to address proactively any challenges to protect our profitability and sustain our growth trajectory.

With these factors in mind, we are reaffirming our full-year earnings framework for net sales and adjusted free cash flow, but we are, however, raising our outlook for our adjusted EBITDA. We now expect adjusted EBITDA to grow low and to mid-single digits compared to the prior year. On the strategic front, the recent announcement of our partnership with Oaktree Capital in our Home & Personal Care business is a meaningful milestone in our long-term objective of separating HPC from our other businesses. While little will change in the day-to-day operations of HPC, we are confident that this partnership will help the team pursue new growth opportunities and deliver lasting value. Our teams will continue to operate with the same dedication and focus, ensuring continuity and stability to our customers and employees.

Outside of the appliance business, we continue to seek strategic M&A opportunities within both the pet and Home & Garden segments. With that said, we will continue to exercise discipline and prioritize the strength and stability of our balance sheet. We firmly believe that maintaining a healthy balance sheet provides us with a distinct competitive advantage, especially as new opportunities and deals emerge in the marketplace. This approach ensures we are well-positioned to act decisively and capitalize on attractive prospects while safeguarding our long-term financial health. Before I turn the call over for Q&A, I'd like to thank our team for their exceptional commitment and focus in a dynamic market environment.

The results we achieved this quarter are a testament to the team's adaptability and determination, and I'm confident that our collaborative spirit will continue to drive us forward as we embrace new challenges and opportunities. I thank you all for your hard work and for supporting our shared vision as we move ahead together. Now back to you, Jen, and we can start the Q&A.

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