Spectrum Brands Holdings Inc (SPB) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q2 2022 Spectrum Brands Holdings, Inc. Earnings Conference Call. (Operator Instructions) Note that today's call is being recorded. (Operator Instructions)

It is now my pleasure to turn the call over to Mr. Jeremy Smeltser. Please go ahead.

Thanks, Ray, and good morning, everyone. Thank you for joining us. Welcome to Spectrum Brand Holdings Q2 2022 Earnings Conference Call and Webcast. I'm Jeremy Smeltser, CFO of Spectrum Brands, 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 spectrumbrands.com. This document will remain there following our call.

Moving to Slide 2 of the presentation. Our call will be led by David Maura, our Chairman and Chief Executive Officer; myself; and Randy Lewis, our Chief Operating Officer. After our opening remarks, we will conduct Q&A.

Also on the call with us today is Faisal Qadir from my team. As many of you know, Faisal has been supporting our IR efforts over the past 2 quarters since Kevin's departure. Today, I'm pleased to announce that Faisal will be assuming the full-time IR duties going forward. We're confident he will do a great job supporting you all. We appreciate everyone's patience as we continue to work through the transition.

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 May 6, 2022, and our most recent SEC filings and Spectrum Brands Holdings' most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement.

Also, please note 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.

I will now turn the call over to David Maura.

Well, thank you, Jeremy. Good morning, everybody, and welcome to our second quarter earnings update. We appreciate everybody joining us this morning. .

I'm going to kick the call off with an overview of the company's performance and a reminder of our capital allocation priorities. Jeremy will then provide a more detailed financial update, and then Randy will provide an operational update, including the business unit results.

If I could get everyone to turn to Slide 6. Once again, we delivered top line growth this quarter. Despite some continued product availability challenges, our total sales increased 6%. While organic sales, excluding the impact of FX and acquisition, increased 2%.

Despite another difficult quarter battling inflationary pressures, I'm actually very excited about the balance of the year. As expected, our margins contracted versus prior year as input cost inflation continued to exceed our price actions. However, our gross margins improved 260 basis points versus the first quarter results, and as we implemented further planned price increases during the quarter. We now expect to restore our margin structure by the middle of this current quarter.

And just to put that in perspective for everyone, if you can recall, our continuing operations EBITDA in fiscal 2021 was about $390 million. And on an annualized basis, we've had to take action to offset over $400 million of inflation just in the past 18 months. So I'm extremely pleased. Our team's ability to navigate that amount of inflation in that short of a time frame, in my opinion, is truly remarkable. And it's honestly great to have a challenging first half behind us, and now to be looking out towards much improved expected performance in the second half. I really couldn't be more proud of the operating teams for navigating this inflationary environment.

On the strategic front, I'm excited to share that we're continuing to make progress towards our goal of evolving into a faster-growing, higher-margin, pure-play global Pet Care and Home and Garden Company. We believe we can create meaningful shareholder value with this transformation. We continue to work toward the closing of our sale of our Hardware and Home Improvement segment to ASSA ABLOY for $4.3 billion, and we remain confident that the transaction will close this year. We are simultaneously working on laying the groundwork for the eventual HBC separation from Spectrum Brands, which will bring us closer to our strategic vision for the company.

The acquisition of the kitchen appliance and cookware categories of Tristar brands was completed during the second quarter, and the work of integrating the newly-acquired business into our HBC organization is already in full swing. Given the closure of the Tristar acquisition during the second quarter, we would like to provide an updated earnings framework. We now expect sales growth to be in the range of mid to high teens growth and adjusted EBITDA growth to be in the mid-single-digit range. As a reminder, this outlook includes just over 7 months of the Tristar acquisition, and it does not include the benefit of the peak holiday season for fiscal '22.

There are 2 new developments that I need to mention during this call that are impacting our financial results in our core business units this year. One, given the Russia-Ukraine war, we have chosen to suspend shipments to Russia. And two, the adverse weather and the late start to the home and garden season so far this year have the potential to negatively affect full year Home and Garden sales and EBITDA. With the impact of these 2 items, our core business EBITDA is now expected to be flat to down a couple of percentage points.

If I could get everyone to turn to Slide 7. Our capital allocation priorities remain consistent. We will continue to focus on allocating capital internally to our highest return opportunities. We believe this strategy has been paying off for us as we continue to drive growth through product vitality across our business units.

Second, we plan to return cash to shareholders via dividends and opportunistic share repurchases. More recently, we just concluded the prior quarter's $150 million stock buyback plan, and we expect to significantly accelerate share repurchase activity once the HHI transaction is closed. Further, we will continue to pursue disciplined and strategic M&A transactions that are both synergistic and help drive long-term value creation.

In summary, we're looking forward to closing the pending HHI divestiture, recapitalizing our company, deleveraging our balance sheet and moving to a transaction to separate our home and personal care business. We are more confident than ever that the public markets are looking to invest and allocate capital to a more pure-play global Pet Care and Home & Garden Company, and these actions should result in a re-rating of the valuation of our publicly traded shares.

Before I turn the call over to Jeremy, I would like to take this time to thank our global, commercial and supply chain teams whose collaborative efforts have helped us achieve significant pricing actions that were necessary to minimize the impact of the unprecedented inflation headwinds that our business has been facing. I would also like to thank our global employee partners and the management team for their tireless efforts in the face of the many challenges this company has had to overcome during the past several years. The team's success continues to demonstrate our winning culture and the successful adoption of our operating -- global operating model.

Now, you'll hear more from Jeremy on the financials. I'll turn the call over to you, Jeremy. Thanks.

Thanks, David.

If I could get everybody to turn to Slide 9 for a review of our Q2 results from continuing operations. I'll start with net sales. Net sales increased 6.2%. Excluding the impact of $17 million of unfavorable foreign exchange and acquisition sales of $49 million, organic net sales increased 2% from pricing actions on increasing freight and input cost inflation with lower comparable volumes due to product availability issues and prior year stimulus spending.

Gross profit decreased $5.4 million and gross margin of 31.6% declined 270 basis points from a year ago due to accelerated freight and input cost inflation pacing ahead of price increases, partially offset by productivity improvements. SG&A expense of $220 million increased 11.9% at 27.2% of net sales, with the dollar increase driven by higher distribution and transportation costs and higher marketing and product development.

The operating loss of $8 million was driven by the gross margin decrease and higher SG&A I mentioned, and investment in strategic transactions and restructuring initiatives. The declines in GAAP net income and diluted earnings per share were primarily driven by the operating loss offset by much lower interest expense.

Adjusted diluted EPS declined to $0.41, driven by lower operating income from the gross margin decline from inflation and higher SG&A. Adjusted EBITDA was $79 million, declining due to accelerated freight and input costs, pacing ahead of pricing actions and higher distribution costs, partially offset by improved productivity.

Turning to Slide 10. In Q2, interest expense from continuing operations of $24.7 million decreased $28 million due to prior year one-time refinancing costs. Cash taxes during the quarter of $12.3 million were $7.1 million higher than last year.

Depreciation and amortization from continuing operations of $25.7 million was $4.5 million lower than the prior year. Separately, share and incentive-based compensation decreased from $7.2 million last year to $6.6 million this year. Cash payments for transactions were $8 million, up from $3.1 million last year, and restructuring and related payments were $17.6 million versus $7.5 million last year.

Moving to the balance sheet. The company had a quarter-end cash balance of $194 million, and $308 million available on its $1.1 billion cash flow revolver. Total debt outstanding was approximately $3.3 billion, consisting of $2 billion of senior unsecured notes, $1.17 billion of term loans and revolver draws, and $98 million of finance leases and other obligations. Additionally, pro forma net leverage was 5.2x compared to 4.7x at the end of the previous quarter as the trailing 12-month EBITDA declined and we had an increased outstanding balance on our revolver facility to fund the Tristar acquisition.

During the quarter, the company repurchased approximately 200,000 shares for $24 million, completing the previously announced $150 million 10b5-1 share repurchase plan. Capital expenditures were $10.2 million in Q2 versus $9 million last year mainly due to higher investments in our SAP implementation.

Turning to Slide 11 and our expectations for 2022. As David mentioned, we're updating our earnings framework to include the impact of the Tristar acquisition. We now expect reported net sales growth of mid to high teens, with foreign exchange expected to have a negative impact based on current rates. As communicated on the last call, we expect $310 million to $330 million of total inflation during the year and intend to offset the inflation through pricing and cost management actions.

Our adjusted EBITDA is now expected to grow in the mid-single digits, which now includes the impact of business interruption in Russia in addition to the impact of 7.5 months of the Tristar business.

From a phasing perspective, we expect our second half margins to improve as the first half was most negatively impacted by inflation pressure on a net basis. Depreciation and amortization is expected to be between $120 million and $130 million, including stock-based compensation of approximately $25 million to $30 million. Full year interest expense is expected to be between $95 million and $105 million, including approximately $7 million of non-cash items. Restructuring and transaction-related cash spending is now expected to be between $70 million and $75 million. Capital expenditures are expected to be between $85 million and $95 million.

We ended 2021 with approximately $725 million of usable federal NOLs and expect to use substantially all of them to offset a portion of the gain on the sale of HHI. We are projecting to be a U.S. taxpayer in fiscal '22. Cash taxes are expected to be between $30 million and $40 million. And for adjusted EPS, we use a tax rate of 25%, including state taxes.

Regarding our capital allocation strategy, after the closure of the HHI sale, we are targeting a near-term gross leverage target of 2.5x. And after full deployment of the HHI proceeds, we are targeting 2 to 2.5x net leverage for our long-term target.

Now, over to Randy for a more detailed look at our operations and business unit results.

Thanks, Jeremy, and thank you all for joining us again this morning. I will review our second quarter operations results and business unit performance. But first, before I do that, I'd like to provide an overview of our operating environment.

Moving to Slide 13. The overall supply chain and cost environment remained challenging in the quarter, in line with our expectations. Inflation remained high and the supply chain issues, although showing some improvement, continue to persist throughout the quarter. As we have discussed on the previous call, our supply chain team has been focused on improving product availability. This includes enhancing our supply chain resiliency by finding alternative sources of supply to ensure continuity in cases of other supplier facility shutdowns as well as contract extensions with critical suppliers to avoid future disruptions.

All of these efforts led to higher volume inventory shipments from our suppliers in Asia. However, demand continued to outpace product availability in many of our categories as a result of delayed ocean freight shipments post Lunar New Year and previously low safety stock inventory levels.

As I mentioned earlier, the global supply chain is showing some improvement, and lead times as well as ocean freight rates are starting to stabilize and beginning to show signs of decline. Although these are promising developments, we do not anticipate a step change improvement in either lead times or ocean freight rates in the short term, but our freight inflation outlook for the fiscal year has not materially changed.

As previously mentioned during the call, the war in Ukraine has led to the suspension of our business in Russia starting in the middle of Q2. The war is also driving further pressure on material cost inflation, but we anticipate most of that incremental cost to materialize to the P&L starting in fiscal '23.

Moving to Slide 14. I would like to highlight the various actions that we are taking to address these challenges.

First, I would like to start by acknowledging the hard work completed by our commercial teams to secure significant price increases across the many channels in our marketplace. I am pleased to share that over 98% of all of our planned price increases have now been accepted by our customers, and we expect all of our planned price increases to be fully implemented by the mid-third quarter. This will drive sequential margin improvement in the second half of the fiscal year. We will have business-specific pricing updates later on in the call.

Second, we are in the process of renegotiating our ocean freight carrier contracts with the goal of securing more freight cost predictability and more contracted carrier capacity.

And finally, we continue to focus on our customer collaboration and operational execution to ensure we can react quickly to changing customer dynamics. All of these actions are enabled by leveraging our operating model transformation towards one global supply chain team, with collaboration across each of our business units and regions. We continue to improve our delivery performance and service levels while managing through the challenging operating environment.

Now, let's dive into the specifics for each business. I'll start with Home & Personal Care, which is Slide 15. Reported net sales increased 6.1% and organic sales decreased 2.1%. Adjusted EBITDA decreased to $10.5 million. Organic net sales declined as the prior year sales were historically driven by COVID-related demand supported by stimulus spending. However, our Latin American region continues to post strong sales performance driven by higher consumer demand, expanded distribution and strong performance.

Reported sales growth was aided by the addition of Tristar brands to our small kitchen appliances portfolio. We've already initiated the process of integrating to Tristar with our legacy HPC business, and the team is very excited about the prospect of unleashing the combined potential of these 2 great teams and leveraging the newly acquired direct-to-consumer capabilities and an expanded portfolio of brands.

Organic sales declined despite continued momentum in garment care products, which again posted double-digit growth. We continue to build on our #1 share position in the U.S. garment care category. Small kitchen appliances posted declines in sales as the category had experienced increased demand during the second quarter of last year. Overall, consumer demand for kitchen and personal care appliances is softening in the U.S. as we return to a more normal consumer environment. Consumer demand for these product categories in Europe is also softening due to overall inflation pressure, which is further accelerated by the war in Ukraine.

Despite these macroeconomic challenges, our products continue to perform well with consumers relative to our competitors. We're very excited about the new product pipeline, which now includes great products like the PowerXL Duo Nutrisealer. It's an innovative, handheld food saver vacuum sealer with patented double seal technology. It was just launched with a strong consumer -- a direct-to-consumer marketing campaign through TV and social media, and is doing extremely well.

The launch of our Russell Hobbs Attentive and Groove collections in the international markets is helping us achieve growth in the breakfast category. The recent launch of our new Steam Genie 2-in-1 Iron and Steamer is driving growth in the Garment Care segment, furthering our leadership there. Our consistent commercial wins over the last 2 years and strategic investments give us confidence in our plans to grow share and shelf space in our key markets.

Lower adjusted EBITDA margin was driven by accelerated freight and input cost inflation ahead of incremental pricing actions and continued investments in marketing and new product development initiatives, partially offset by productivity improvements. As we outlined on our previous call, inflationary headwinds are only partially offsetting -- offset by earlier waves of pricing in the first half of the year.

The good news is that most all pricing actions that were planned to offset the forecasted inflation for fiscal year '22 are now accepted, and will be fully implemented during the current quarter. As a consequence of pricing actions, we expect our gross margin profit to improve throughout the quarter and even more so in the fourth quarter.

Moving to Global Pet Care, which is Slide 16. Consumer demand for our pet care categories remained strong, but our ability to deliver product continued to be challenged. Despite these challenges, the Pet Care business delivered reported and organic net sales growth of 0.5% and 2.5%, respectively. Higher net sales were attributable to strong growth in companion animal, offset by softness in aquatics. Pricing secured in Q1 also contributed to growth in sales value.

Q2 represented a 14th consecutive quarter of revenue growth for the business, with growth across all geographies. Our Asian suppliers have now ramped up production to above pre-COVID levels, but we continue to experience product availability impacts as longer shipment times prolong the inventory recovery into our warehouses. We are working hard to reestablish appropriate safety stock levels and expect these efforts will lead to further improvement in product availability and fill rates throughout the balance of this year.

Product supply was affected by supply chain disruptions that mainly impacted the U.S. and Canadian markets. Sales growth in EMEA was driven by increases in companion animal and dog and cat food categories despite being negatively impacted by sales decline from Russia, including high-margin aquatic products.

We continue to see strong demand for our Chews and Treats and Other Feeding Nutrition segments, including our dog and cat food business in Europe. These segments represent a significant portion of the portfolio and is representative of the long-term stickiness that we believe exist in these categories.

While our overall Aquatics business declined during the quarter due to the impacts of the war in Europe and the impact of lapping multiple stimulus events from last year in the U.S., we remain encouraged by the category fundamentals within our core focus areas of Food, Filtration and Specialty Live Fish. Our live fish royalty revenues and commercial aquatics businesses performed well within the quarter, which is a good indication of the overall health and long-term outlook of the fishkeeping hobby.

Adjusted EBITDA for the business declined to $40.6 million. Lower EBITDA in the quarter was driven by increased freight and input cost inflation, pacing ahead of the incremental pricing actions as we had previously communicated. Almost all of our planned pricing that we had discussed in the previous call has now been completely accepted by our customers and is in the process of being implemented. We anticipate all planned pricing to take effect in the middle of the third quarter. We expect price coverage and margins to improve in the third quarter as a result. We will achieve our full target inflation coverage and margin levels in the fourth quarter.

With the level of secured pricing in place and the additional actions being implemented, we remain bullish on the business fundamentals and optimistic that we will deliver our fourth consecutive year of both top and bottom line growth. Our long-term focus remains on the execution of our strategy, which is centered around inspiring trust due to delivery of unique and innovative products in order to drive demand for our portfolio of leading brands.

And finally, Home & Garden, which is Slide 17. Reported and organic net sales increased 16.5% and 8.5% respectively in the second quarter. We delivered organic sales growth despite unfavorable weather across most of the U.S., which reduced category POS during the quarter and caused customers to pause inventory builds. The weather had an adverse impact on the foot traffic at key retail customers, which led to slower-than-expected sales in both pest control and cleaning categories. Net sales was helped by price increases.

Despite the short-term weather challenges, we continue to pace with the category and expect strong customer and consumer demand as conditions turn more favorable. In fact, we are already beginning to see strong POS response to warmer weather, specifically in the Southeast and South Central regions of the country over the past couple of weeks. We remain positive on the outlook for the full year as most of the selling season for this business is still ahead of us.

We continue to invest to deliver truly innovative consumer solutions in this business and to tell our story around the brands of Spectracide, Hot Shot, Cutter, Ecologic and Rejuvenate We've also recently completed a brand refresh for our Cutter and Ecologic brands, which is tested extremely positively with consumers. These brand refreshes meet the changing lives and distinct needs of today's modern families.

Our product development driven by consumer insights continues to drive our new product portfolio. This year, we are particularly excited of our wheat and grass killer products, one-handed operated flip-and-go sprayers, and AccuMeasure concentrate products that are now shipping into the market. These innovations in our go-to-market strategy have led to significant distribution gains for the current lawn and gardening season.

Adjusted EBITDA increased 8.3% driven by higher sales, offset by continued investments in marketing and product development. We see higher product costs from raw materials, labor and freight, in line with our expectations. To offset this additional pressure, we implemented another round of price increases that went into effect in the second quarter. The great news is that we have now implemented all planned pricing to cover the anticipated inflation for fiscal '22. Consequently, we expect margins to improve during the second half of the year.

The integration of the Rejuvenate business is now complete, and we are confident it is set up for long-term success as part of Spectrum Brands. We will also start to realize the synergy benefits from this integration, starting with the third quarter results.

All in all, despite the challenging weather, we feel confident with the fundamentals of the category will remain strong. Our Home & Garden business is very well positioned for success within that category in the current and future years, and our investments in marketing will continue to bring new users not only to our brands but also to the overall category.

To end my section, I want to thank all of our global employees on the progress we've made on our operating model, cultural advancements and our strategic initiatives. Thank you, and now back to David.

All right. Thanks, Randy. Thanks, Jeremy. Thanks, everyone, for joining us on the call today.

We've covered a lot of ground today, so let me do my best to try to give you the summary here and with our key takeaways. It's on Slide 19.

First, we continue to make progress on our strategic objectives of creating a higher-margin, faster-growing Spectrum Brands, and that business is going to be focused on Pet Care and Home and Garden consumable products. The HHI divestiture continued to progress well with the teams focused on supporting ASSA ABLOY with the regulatory review. With the completion of the recent acquisition of the Tristar business, we're taking a significant step forward on our objectives to create a separate pure-play global platform of powerful portfolio-leading brands in the Home and Personal Care appliances space.

Second, our business fundamentals remain generally solid, and we continue to post sales growth despite all the supply chain challenges as our investments in marketing and new product innovations are translating into success in the marketplace. We are taking further actions to enhance our supply chain resiliency by increasing our warehousing capacity and contracting increased ocean capacity. We believe these actions will continue to improve our product supply situation. Most of the pricing is now in place and is expected to improve our pricing coverage for inflation and margins with each sequential quarter.

Thirdly, we are updating our earnings framework for fiscal '22 to include the impact of the Tristar business acquisition and some additional headwinds from the Russia-Ukraine War and the impact of a late start to the Home and Garden selling season. The majority of our pricing actions are now in place to offset most of the inflationary cost pressures, and we will continue to evaluate additional countermeasures to ensure we deliver on our updated earnings framework. We will continue to leverage our operating model to execute on our winning playbook, and we remain encouraged by our retail partners' enthusiasm for our categories, brands and our new product launches.

I want to reiterate our commitment to managing our businesses for the long-term success. I am proud of the way the team has come together to manage through these challenging times. I remain confident that this management team will continue to execute with discipline to drive the profitability of our company in fiscal '22 and beyond.

And I want to close by saying thanks again to our employees who are navigating our company successfully through these unprecedented inflationary times. I want you to know that the future of Spectrum Brands remains very bright as we continue to make living better at home.

Now, I'll turn it back to Jeremy for any questions.

Thanks, David. Raine, you want to go ahead and kick off our Q&A process, please?

Operator?

Raine, are you there?

Sorry, I was on mute. (Operator Instructions) Your next question comes from Bob Labick from CJS Securities.

I guess, certainly, a lot of talk about -- on the last call, I think you spoke a little bit about you're strategically building the inventory to be able to help buffer some of the supply chain issues. I was just wondering -- I know you spoke to this a little bit, Randy, but can you kind of dig a little deeper and maybe summarize for us, where you stand in terms of inventory as you want it and your ability to offset high demand in certain areas? And how we should think about how that inventory build has helped or will help, or where you stand for it?

Yes, Bob. I would say overall, we've made material improvements in our fill rates in the aggregate over the course of the quarter, and that's predominantly driven by, again, the continued investment in inventory. But there are pockets where both the demand as well as the supply continue to be acute issues. And the biggest issue for us is in our Global Pet Care business where we have a discrete issue having to do with some Vietnam, Cambodia supply on chews and treats that we're still battling. Have been, as we've talked about for the last couple of quarters. And that's going to linger for us for a while, but it's getting better every week.

And so we're -- we're happy to have the solutions in place, but the problem with ocean freight timing in the 110 to 120 days is that those solutions, once they're in place, take a while to get into our system and allow us to recover those inventory amounts.

But I would say in most other general areas of the businesses, the inventory levels are getting closer to where we want them to be.

Got it. Okay. Great.

And then on HPC, obviously, everyone understands the inflationary pressures and stuff. Can you give us a sense of the timing of margin recovery there? And then also, once you do get kind of the full price parity, for lack of a better term. What's the margin outlook with Tristar in? If you just remind us how margins should trend versus historically once Tristar is fully integrated and you get back to kind of price parity?

Yes. Listen, I'll take that.

I think at the outset of the call, I kind of said, hey, it's -- it's tough to report another quarter where you're fighting inflation, but I'm super happy that we're kind of turning the corner. I think if you look at the business overall, we spent the last 6 months trying to fix margin structure, and we believe we've got that accomplished now here in the third quarter.

And so I think it's not just HPC, but it's basically all the different business units, you should start to see some real margin expansion as we move forward here. And look, I'm looking at our internal numbers, and I see a pretty significant margin expansion for HPC as we get into -- in the current quarter, and then it expands a lot more into the fourth. And so I think you could expect us to kind of return EBITDA margin to the high single digits as we get toward the back half of the year.

And then I think -- look, I think a low double-digit number is kind of on the EBITDA margin line where HPC should kind of fall out. I think just to give some further color there, I think in Randy's opening remarks, he mentioned a Nutrisealer. And I want to give you some flavor there that this Tristar acquisition actually has a lot of legs already, too. This is a product that is -- we make in our content studios. We build infomercials with them. We put spokesmans around that. We spend a lot of money in marketing that, and we're finding tremendous traction.

And I can tell you that our legacy business is not used to launching a product with 0 revenues and taking it to something significant. I would tell you that we've gone from kind of a 0 market share there in food sealers to, I would call it, mid-teens, kind of right out of the gate. I'm super excited about it. It's a product that, particularly in the current environment, allows you to kind of save food and have those leftovers. And so I think that's particularly well timed for the current economic situation with inflation and food prices. And this is a business that I think can be tens and tens of millions of dollars of new very profitable revenue.

So already kind of seeing the ability to take our legacy business, put it in a content commercial production facility, do some DRTV with it and see the consumer takeaway. Truly exciting, and it's also got a replacement bag business to it, which is the recurring revenue stream, kind of razor-razorblade to it. So we've had additional success just on color.

And I know we're going to spin this unit out, but I'm excited about it. I want to give you some tangible results here in the early innings of the integration. We were able to take a pretty exciting blender that we had, and we felt limited with the current brand situation of the legacy portfolio. We were able to rebrand that under the PowerXL trademarks and launch a new exciting blender under the PowerXL brand, and again, put some production, some content behind it, and we've got a pretty significant win there already.

So very promising outlook, and I think those actions that I'm talking about are going to be part and parcel to increasing the margins that you're looking to and I'm looking to see manifest there in the next couple of quarters.

Okay. Great. That's super and exciting.

One last one, I'll jump back in. And I suspect it may be a little too recent, but given the market volatility and pullback, can you give us a sense of the M&A outlook? I know you have to close also and you have, I don't know, hundreds of things on your plate, but you're also going to have tons of cash in. So what is the outlook for potential other tuck-in brands? And have valuations become more reasonable? Or how are you thinking about that?

I don't see valuations have come in a whole lot yet. I think seller expectations are still pretty high. I think as I look out -- again, I'm starting to sound like a broken record on these calls, but I view our currency as kind of the cheapest thing to acquire. And obviously, we know the risks in our business better than I know the risk of a platform that we would acquire. And so again, I think our priorities would be -- the day we close is a big debt paydown and it's -- I've mentioned in the comments numerous times that we would accelerate our share repurchase activity, particularly if the stock stays at current levels and it has the valuation that it currently does.

So I'm much more comfortable turning my attention to buying back a lot of stock. I will tell you that I'm going to spend the summer with this management team with Pet and Home & Garden probably, numerous outside consultants kind of (inaudible) the business. Really looking at where our strengths, weaknesses, opportunities, threats are, and then look also competitive set. Try to figure out where my blind spots might be, where the hockey puck is going to be 3 or 5 years from now. Because really, we want to kind of present to the Board in November kind of our outlook for building back the kind of $5 billion-ish revenue, $1.5 billion plus EBITDA, pure-play Pet, Home and Garden company.

That's really the -- that's where we're trying to navigate the ship here, and I think it would be prudent for us to kind of do some deep dives. Spend 3 to 4 months really looking at what we can accomplish organically, where we need to fill some holes inorganically. Let's just get smart on that. Our currency is cheap, let's buy that in.

And then I think your question to me would be more pertinent on maybe the November call or even early 2023. I don't want to make any big moves right now. I want to get the balance sheet super healthy. I want to shrink the flow, and hopefully, sellers' expectations come down while we're getting smarter, would be my answer to that.

Okay. Super. That's great.

Your next question comes from Steve Powers from Deutsche Bank.

So first, just a couple of cleanups. I don't think you mentioned it, if you did and I missed it, I apologize. But do you have an expectation for what Tristar's contribution to fiscal '22 EBITDA is? That would be question number one.

Question number two is you made some tweaks to the CapEx and the cash restructuring expectations for the year. Maybe just a little bit more color as to the moving parts on those items as well? That would be great.

Sure. Yes. Cash restructurings come in a little bit heavier than all the things. As Bob mentioned in his question, we have a lot of activities going on in the business, planning to separate HHI, planning on HPC. And on CapEx, that's really just timing as things have shifted in timing of our SAP investment, so that's really $5 million to $10 million shifting into next year. And I think...

Yes. On the Tristar piece, I really don't want to break that out. Look, I want to spend the first year -- we're going to spend a lot of money integrating it. It's going to cost me a lot of cash. I want to spend very heavily against new product launches, and that's going to burn EBITDA. So I'm not looking for the super wonderful profitable Tristar right out of the gate.

I would tell you that based on how we underwrote it, my current synergy expectations are higher than the day we bought it. And I will tell you that I think it's going to be a very meaningful EBITDA contributor to the business in fiscal '23. But I really want to get it fully integrated, fully operational, truly kind of just one new company, and I want to spend really heavily in this current market environment against some new product launches, which will very much dampen their profitability in the short term, but I think we'll pay us significant dividends '23, '24.

Okay. So the synergies, you think you can capture pretty quickly as looking at '23?

Well, look, I would tell you this. The next 2 months is going to be a lot of heavy lifting. I was just in Middleton for a week. We've got teams all over the globe. I mean, this is a big global business, and so there's a lot of work streams. And the next 60 days is pretty heavy lifting here.

It's just -- look, as I look to separate the business out and create an independent entity, I'm much better served, in my opinion, investing heavily now to create a stronger earnings stream as it becomes a stand-alone entity in future years. That's really what I'm trying to say.

Okay. That's fair enough. Okay.

Then my other question would be, you mentioned the sort of the building cost pressures post-Russia and Ukraine. They probably start to impact you more so exiting '22 into '23. You also talked about some of the macro headwinds and fluctuations that are impacting top line kind of consumer demand in some of your businesses.

So as you think about that, like what's your thought process as to taking incremental pricing actions or what have you to counter the cost headwinds that you see accruing in the out year? And what would be the timing for you making those decisions?

Look, I think what I really hope people take away on this call, so I'll re-underline it, is this is a company that, excluding HHI, at about $390 million of EBITDA last year. And that (inaudible) has had the price for over $400 million. I mean, we've had to replace the entire earnings power of the company in the last 18 months. And what I'm telling you is, I'm thrilled to kind of be through the first half because I believe we've accomplished what we need to do there.

Look, freight rates are still elevated. They've come down a little bit. I think what we're trying to tell you, too, we're trying to be completely transparent in our base EBITDA, the core. This Russia-Ukraine thing, it happened recently. It's super unfortunate. We have tried to be as good as steward of our human capital there as possible, and we've moved, I think, 34 people out of Ukraine. But unfortunately, we've had to stop sales into Russia. And if I had to put a guess on it, it's probably going to land somewhere in the tune of a $10 million hit to EBITDA in this current fiscal year.

And I just -- I don't see the ability to kind of make that dividend up with less than 5 months to go, and I certainly don't want to just keep -- I don't want to cut marketing spend to kind of make a number. And so that's the situation there.

But look, I would tell you we still have -- look, I think small kits and electrics is where you're going to see $6 a gallon start to hurt discretionary income and people bought a lot of those products during COVID, and so I think that's where you see the sales headwind developing the most in the current economic situation. I think people are pretty -- I'm not here to tell you that pet supplies is completely inelastic, but I'm happy with our pricing power in Pet and Home and Garden. And I believe that people are going to continue to enjoy their pets, stay around their homes. And we believe that, that side of the equation is going to keep a stronger demand outlook, and recent POS confirms that. And so we're pretty bullish there.

I think what we're trying to say, too, and I think Randy's comments about global supply chain is our Pet demand remains really, really high. We have struggled with a few of our suppliers. And now as we sit here in this conference call, that inventory is in the port, it's hitting our DCs, and so we're getting the fill rates up there in the back half to our customers, but they're still very, very low on any sort of safety stock inventory. And so we see a pretty good demand picture in Pet for the balance of the year.

That was for both, but let me know if that helped.

No, that helped. It gives me some context. So I appreciate it.

Your next question comes from Peter Grom from UBS.

Everyone. I hope you're doing well.

So I just wanted to ask about both the HHI transaction and the HPC separation. So maybe first, I know you said you still expect the deal to close this year, which is pretty consistent with the update since December. But do you know when you may be able -- or you could be in a position to provide a bit more specific timeline? Just -- as thinking about 8 months is a pretty wide window.

And then just on HPC, you mentioned in the release, were laying the groundwork for an HPC separation and just kind of layering in those comments around investing heavily in the business today. Just any updated thoughts around kind of the way you intend to separate that business at this stage either through a sale, IPO or kind of a joint venture?

I mean, listen, I don't have a crystal ball, but I would tell you I expect to have a pretty exciting August conference call, and you should dial into that one. I can -- I'm hoping I can have a lot more clarity then.

Okay. No, that's super helpful.

And then I guess, I wanted an update -- ask around the organic sales outlook. And I know you mentioned Home and Garden weakness is kind of one of the primary reasons for the slightly lower core EBITDA guidance, and maybe we're mismodeling the impact of Tristar. But the updated sales outlook doesn't really seem to imply a meaningful change to the organic sales outlook that you provided last quarter. So maybe just first, is that right? And if so, kind of what are the positive offsets that are allowing you to maintain that outlook?

Yes. I mean, the move isn't real large, right, from low single-digit growth to flat to down a couple of points on the core business. So there's not a lot of net sales impact there. And I would say, we have a decent level of profitability in our pet business as it relates to our Russian legacy sales, so that's really why we're not seeing much of a change there.

I think as you look at the quarter, we certainly left sales on the table in GPC for the product availability issues that Randy and David discussed, which would have driven higher than that 2.5% organic. If you recall, Q1, we had 7.5% organic growth in GPC.

And then in Home & Garden, I would say, versus our original expectations to start the quarter, while we did have some growth, that's actually the lightest performance that we would have expected for that business this quarter based on retailer sentiment towards this season. So early in the quarter, I would say our retail customers had some challenges with transportation. They usually pick up product at our DCs, and they had some issues. And then by the time those were recovered later in the quarter, we've experienced, here in the Midwest, a pretty wet and cold season all the way through March including in April, and that just had retailers delay additional purchases.

So still excited about Q3. Excited to see the weather pickup. Looks like it's going to be in the 90s here in St. Louis next week. Hopefully that carries all across the country, and POS picks up and we see a good pull-through in Q3 and in Q4. And we certainly have invested appropriately partnering with our retail customers on having the right inventory in the right places.

Got it. And best of luck.

Your next question comes from Chris Carey from Wells Fargo.

So I just wanted to build on that and just ask in a similar way, but I'm just trying to understand basically what you're embedding for the rest of the year from a supply chain improvement perspective, specifically Pet on the Aquatics business? And then the other question would just be in Garden, right? So POS picking up, is that important to achieving your outlook? Or are you more or less embedding that retailers are going to have to work down some inventory through the remainder of the year, and that it's going to remain challenging into Q3 as well?

I'm just -- I'm trying to frame -- I appreciate the guide coming down a little bit underlying, and you're going to have some catch-up going in Q3. I'm just trying to frame or dimensionalize what we know versus what we don't know, and kind of how you're thinking about the cadence of improvement of some of these headwinds that have prevented you from providing a little bit more upside on the Q2. So that's just question one.

I'll take the top line on that, and then the guys can add value, add further color.

Look, we expect a really meaningful recovery to Pet. We are getting a lot of inventory into the ports. That inventory is flowing into our DCs as we sit here during this conference call. We are really looking to get our fill rates materially improved there, Q3, Q4. And so we're unclogging that supply chain bottleneck that has inhibited materially the revenue and earnings power of that business. And so we are looking to have a very big back half in Pet, and that's why I'm so excited to look forward here as we finish up this conference call.

Home & Garden, it's so seasonal that if we had a really great week in May. It would -- it could make up for the entire month of February, okay? So it's literally that pronounced. And we could make our original guidance, okay? We're just sitting here and we're saying to you, hey, it's cold and wet outside, and we don't want to overpromise and under deliver. And so based on everything I know today having a conference call, given that we have this late start to Home and Garden season, we think it will be potentially a little soft to our original plan, and so that's what we're trying to communicate.

Could we make it all the way back? Yes, but I'd rather tell you that in August when I got it in the bag as opposed to now. So I'm not hedging. I'm just giving you, hey, this is the current outlook. As of today, this is our best guess given a late start to the weather pattern. But I will tell you this, I love our shelf position. I think we're taking market share. The consumers love our brands. We've turned Spectracide into the #1 pest control product in our channels. Our teams are excited, and we got a lot of R&D coming.

So again, I think that's what we're trying to say is we're very bullish on the fundamentals. But yes, we see a little bit of a weather issue to the start, and it would be irresponsible for me not to flag that for you.

Chris, I just want to clarify on Pet.

So Aquatics is actually doing fine. As you know, we're vertically integrated in most of our Aquatics, and inventory is fine there. Frankly, it's just consumer demand has come down a little bit after last year's surge in aquatic spending by consumers.

It's really some of our outsourced chews and treats that are coming out of Vietnam and Cambodia. As you recall, I guess, around the -- towards the end of our last fiscal year, we had some suppliers that were shut down for 3 to 4 months and those are some of the fastest-moving products that we have, and so safety stocks got eaten into pretty quickly.

The good news is those factors have been back online for -- Randy, the last 2 to 3 months?

Yes, we've ramped up over fiscal Q1 and into fiscal Q2, where we've added substantial incremental capacity. So right now, we're actually producing at a rate of about 150%, 160% faster than what we could have produced a year ago, but it's just taking a while to get that in.

Okay. That's all very helpful then. That was great.

Yes, just one quick follow...

A little clarity on Aquatics. I mean, where we're seeing the softness is in the hard goods and environments, things like tanks and equipment. And that's because we had a very large spike a year plus ago related to stimulus spending. When we look at the consumables, which is, of course, where we're most excited about the category, we continue to see that holding solid demand.

So the people that have gotten into the category over the last couple of years may not have been expanding a lot, but they're staying in. That's great for us.

Okay. Yes. Understood.

And then just one quick follow-up. David, you said the organization is working on the separation of appliances. Can you maybe unpack that just a little bit? Because it sounds like to me you're investing a lot right now, and a lot of the focus is actually going into creating a business that can reaccelerate kind of like post-investments. Or are there other -- is there other work going on to kind of separate the systems, create an environment where the business can be fully separated outright. So does that make sense?

It seems very offensive from an investment standpoint right now. But is there -- I wonder if you can kind of dimensionalize some of the other activities that you're doing just around the separation of that business?

No, you're right on both points. The carve-out of the financials, the ability to completely separate that company out for a merger or spin or what have you, that will be done early this summer. So we'll be ready.

I would just -- it's imperative that we get this integration right. It's imperative that we set this company up to succeed, and so that's why we're taking the actions over the next couple of months to really get this thing integrated and humming as one new company.

Look, we're tired of being disrupted. We want to become the disruptor. You're going to hear a lot of exciting news on this HPC business as we get ready to take it out and stand it up on its own. But yes, we want to make sure that we put it in the best possible footing so that it can win not just in the marketplace, but also in the public markets potentially.

Your next question comes from Nick Zaffino from Oppenheimer.

Yes. I don't know if you guys can answer this, but I'll give it a shot.

On the inflation side, can you give us maybe like what run rate inflation is right now? Or maybe what like year-to-date inflation is? I'm just trying to bear it out what your inflation assumptions are going forward as far as the increases in inflation. So I don't know how you could answer that, but if you could, that would be helpful.

Yes, depending on the volume in the quarter, because we have a little seasonality in HPC and at Home & Garden, obviously, as we've discussed. But it's in the $80 million to $85 million kind of run rate per quarter, give or take. And it should remain that way, I think, in the second half of the year.

Okay. So that basically assumes that there's just sort of flat inflation going forward? Or that's every quarter, you're going to see an incremental $85 million versus the year before?

Yes. The only area that we have seen potential increases, and Randy and David both touched on it, is on some of the commodity inputs to our consumables in global pet care. So these are mostly chews and treats. A lot of it produced in Asia, so as you can imagine, there's an impact on what's happening with Russia, Ukraine that we see coming. But there's lead times there, and we have an ability to negotiate with suppliers, and that's why we say it probably doesn't impact the P&L this year so much, but it will be an impact for next year. And we're in the process of evaluating what that looks like.

And to the earlier question, what, if any, additional price increases we need to make? But we should also remind people that the improvement in margins we're expecting in the second half comes from all that incremental pricing that we didn't have in the first half, which is a positive to the first half of next fiscal year. And so I think we feel like we're positioned pretty well.

But I think while we don't see a massive move in ocean freight rates right now, we do see some indications that the market, including carriers, have some expectations for lower rates getting into '23 and '24. So things seem to be decent despite the crisis of Russia-Ukraine.

Okay. Great.

And then as a follow-up, can you maybe just talk about how you think the businesses might perform in a downturn, an economic downturn? I mean, you've historically been very much of a kind of a replacement product. I mean, the portfolio has changed since you say the last recession. But can you maybe give us kind of a framework and what to -- or how to think about how the business might perform?

Yes. I mean, you're right, the portfolio has changed a lot. So I think that's important for everybody to think through. So on the HPC side, obviously, we've talked about some form of separation. But it is essentially a replacement business after going through the pandemic, especially on the Kitchen Appliance side. I think on the Garment Care and Personal Care side, there's actually a little bit better dynamics right now as the world reopens.

But the most important thing to do is focus on Global Pet Care and Home & Garden, and those combined businesses are 90% consumables and they move pretty quickly. And we have a good customer base in Global Pet Care that we expect we'll continue to spend on their pets, and that's what I think the macro trends tell us globally.

And then in Home & Garden, I think it's very defensive, right? The concept of moving to the south where longer seasons, people living in HOAs where the yards have to look nice. And frankly, we're a trade down to a more costly approach to outsourcing some of the things that our products can do for consumers. So I really like how we're positioned.

I think, Raine, we'll take one more call.

Your last question comes from Carla Casella from JPMorgan.

Great. I made it to the end of the pile.

Couple of questions. One, on the cut back in CapEx. Is that just driven by the fact that you're running below kind of run rate year-to-date? Or did you delay any projects there?

Yes. I mean, we've got a couple of small projects in areas where we see volume declines that we've talked about on the call. But the predominant is really just timing of our SAP investments shifting a little bit into 2023.

Okay. Great.

And then on the cost side, the inflation, is there anything that you can hedge? Or can you talk about the ocean freight side, as you mentioned you're contracting on additional capacity? Are you seeing those rates still 2x to 3x or more above 2020 levels and do you have to lock those in? And what's your thoughts there?

Yes, Carla, this is Randy.

I would tell you, in ocean freight, the spot rates have come down off of peaks from earlier in the calendar year a little bit. But the ocean freight contract opportunity is, of course, I think we all agree that in 2 years from now, 3 years from now, rates should be dramatically different. And so locking in for a predictability, but almost immediate benefit to us to the current spot rates is an attractive option for us we're evaluating.

Okay.

And on the other inflationary items, can you hedge any of that? Or can you say like how much of your COGS or items that are the most defensive, like I'm guessing PET or any other key items?

Yes. Like from a market perspective, there's -- we don't -- there's not a lot of things that we buy that we can hedge kind of third party. We do approach hedging more through contractual agreements with our suppliers where possible. But that's really it for us.

Carla, it's Dave.

Look, I think at the end of the day, where I sit is the last couple of quarters have been truly unprecedented from an inflation standpoint. And where I sit today is, I'm pretty thrilled that we've done what we've done on the pricing side.

I think as I look at freight, prices got super frothy, they've come off a little bit. They're stable here. They're not coming down as much as we'd like. But I think that -- I think, given what I -- on the durable side of the economy, I think there's going to be a decent amount of demand disruption as we go through the summer with gasoline prices and where we see the cost of money ongoing. And so I actually think freight rates are going to come down significantly as you get into '23. It's my personal view.

And so I -- we're going to contract for capacity as responsible players, but we're not going to take some of these contracts we've been offered recently because we think they're excessive.

I think when I look at our business in terms of hedging, the reason we are repositioning the portfolio to Home & Garden and Pet is that we have significant pricing power and demand tends to be more inelastic in those consumable categories than in some other parts of the portfolio. And so that's -- all of this is part and parcel with the portfolio reshaping that we're doing. And again, we're just excited to kind of -- look, the water has been super rough, and I'm just really proud of the team for navigating through a pretty choppy sea. I think it's going to remain choppy, but I really like how we've gotten the boat off a plane, and we're running pretty good right now. So we're excited about the back half.

Okay. That's great.

And I just have one follow-up on -- so I love that you put out your leverage target or holding that leverage target of 2 to 2.5x, a little over 5x today pro forma. So do you have a time frame for how long it might take to get you to the state? What state does it take the HHI sale debt pay down and Tristar synergies? Or is that -- will you get there right after you sell HHI and pay down debt?

I think we'll get there pretty quickly after closing the sale of HHI.

Like 24 hours after.

Have you given the number of debt paydown? I mean, I'm modeling in $1.5 billion. Is that a different number? Or have you given that?

Yes, we haven't -- yes, so that was a gross in the near term. And look, I think we have a good slug of pre-payable debt out there now, and we have a couple of years' worth of callable bonds. And I think -- so we're pretty flexible on being able to head in that direction. So we'll have more color once we actually get to -- near closing.

Okay. Great. We look forward to that.

Raine. Thank you. We're going to conclude the call. We appreciate your help today. We appreciate everybody joining us. Faisal and I will be available today and next week for follow-ups, please feel free to e-mail either or both of us as well as Leticia, and we'll get you in the queue. Thank you. Have a good day.

Thank you. And this concludes today's conference call. Thank you all for joining. You may now disconnect.