Spectrum Brands Holdings, Inc. Q3 2026 earnings call

Thank you, and welcome to Spectrum Brands Holdings Q3 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 events 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. Turning to slides three and four. Our comments today include forward-looking statements, which are based upon management's current expectations, projections, and assumptions and are by nature uncertain. Actual results may differ materially.

Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August seventh, 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. 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. I'll turn the call over to David Maura. David?

Hey. Thank you, Jen. Good morning, everybody, and welcome to Spectrum Brands' third quarter earnings update. I appreciate everybody joining us for today's call. As usual, I'll start the call with an update on the operating environment, then our operating performance, and I'll finally turn our attention to our strategic initiatives at the end. Faisal will then come on and provide more detailed financial and operational updates, including a discussion on the specific business unit results. If I could have you turn to slide six. Let me start by sharing some of the significant accomplishments since our last quarterly earnings call. This quarter was marked by meaningful milestones, and I believe it reflects the strength of what this team is capable of when we are focused on executing with discipline.

I'm incredibly proud of what the global team has delivered, not just this quarter, but consistently over the past year in the face of a dynamic and changing macroeconomic environment. The results speak for themselves, and they reinforce my conviction that we do have the right people, the right strategy, and the right priorities in place to drive both our near-term performance and long-term value creation for our stakeholders. With that context in mind, let me walk you through a few of the highlights. First, our quarterly results once again outperformed expectations on both the top and the bottom lines. This is a trend we have sustained throughout the fiscal year. Net sales increased 7.7% versus the prior year, with all three business units delivering growth.

In fact, in our Home & Garden business, we delivered a record-setting quarter with net sales of $225 million, surpassing even the elevated demand levels we experienced during the COVID-19 pandemic. Second, on a year-to-date basis, our company has returned to organic growth, a meaningful achievement against a challenging macroeconomic backdrop. While geopolitical tensions persist and volatile trade environments continue to create uncertainty and weigh on consumer sentiment, we've been encouraged by the resilience that consumers have demonstrated across most of the categories we serve. Our Global Pet Care and Home & Garden businesses benefited from solid underlying demand. While we are seeing some expected softness in the Home & Personal Care unit, the trends are consistent with our expectations. Third, on the cost and tariff front, we continue to experience modest inflationary pressure, particularly across commodities and freight.

The tariff landscape continues to evolve with the recent expiration of the Section 122 tariffs and the announcement of new Section 301 tariffs. That said, the proactive approach we took last year positions us well to navigate these pressures in the near term, and we do not view this as a significant headwind for the balance of this year. On the IEEPA refund front, we've made significant progress. While some refunds were collected within the quarter, a more substantial cash collection occurred subsequent to the quarter close. We have now collected substantially all refunds associated with phase I, and we filed over 95% of our phase II claims. In the quarter, we did recognize a receivable for those refunds on our balance sheet, which reflects our confidence in the collection process and the progress we've made to date.

Fourth, if we turn to our balance sheet, we ended the quarter with almost $260 million of cash. We have zero drawn on the revolver, and we have a net leverage ratio of about one times. This is well below the long-term target we've set for the company of two to two and a half turns of leverage. We also repurchased approximately 200,000 shares during the quarter for about $15.8 million. With over $300 million of additional board authorization still remaining, we will continue to be opportunistic in share repurchases to ensure flexibility as we look to capitalize on market opportunities and dislocations. Fifth, on the operational front, in July, we completed our first SAP S/4HANA deployment into the Home & Personal Care business here in North America.

While also finalizing implementation across the remaining Global Pet Care and Home & Garden entities. With these completions, 100% of our Global Pet Care and Home & Garden businesses, and all but the EMEIA region in Home & Personal Care, are now operating on a single unified ERP platform. This is a significant milestone in our multi-year transformation. If I could now turn your attention to slide seven, here I'll give an update on our strategic priorities for the balance of fiscal 2026. These priorities are serving us as a clear guide in our decision-making, our progress against each one of them reinforces the effectiveness of our strategy. First, with respect to financial stewardship, our core objective is delivering growth while maintaining a very healthy balance sheet and strong margin structures.

Our quarterly results demonstrate how deeply the team has embraced this philosophy. Year to date, we've delivered $136 million of adjusted free cash flow through disciplined working capital and CapEx management, including approximately $3 million from tariff refunds. Operationally, our S&OP process continues to perform at a high level. In fact, I once again maintained fill rates above 95% across all three business units this quarter on a linear inventory base. This reinforces the fact that we can deliver for our customers without sacrificing working capital discipline. Second, if I move to operational excellence, I'd like to build upon what I shared earlier as it relates to the S/4HANA ERP transformation. As I mentioned, we're now in the final stages of this multi-year project, with only the HPC EMEIA region deployment remaining later this year.

I want to take a moment on this call to sincerely thank each one of our global team members who have driven this implementation. This has been a long, hard process, their dedication, patience, and perseverance over the course of this journey has been remarkable. Reaching this point is a really significant milestone that should not be understated. That said, completing this implementation is not our finish line. It's simply the foundation. The real opportunity for our company lies in what comes next. Leveraging this new platform to further standardize our processes, drive efficiency improvements, and ultimately unlock the full potential of what a unified global ERP system can deliver for our business and our stakeholders.

We do have meaningful work still ahead of us, I'm confident that we have the right team in place to capture that value over time. This brings me to our third key priority, which is investing in our people. At the start of the fiscal year, we set a clear intention to raise the bar on both talent and leadership, recognizing that building the right team is foundational to executing the strategy and long-term sustainable growth we desire for our company. This isn't something that happens overnight, but as I reflect on where we stand today, I'm genuinely proud of the progress we've made. Over the past year, we've made meaningful leadership changes within the Global Pet Care business, bringing in experienced CPG talent with a very strong focus on consumer-led insights and data-driven decision-making.

These additions have already begun to strengthen our commercial capabilities and sharpen our go-to-market approach. Our fourth priority for fiscal 2026 is strategic transformation. Our key brands in both the Global Pet Care and Home & Garden businesses continue to deliver above-market growth, driven by consumer-led insights and bolder new product development. M&A remains a meaningful priority for us, and we are active in the market, evaluating opportunities across both our pet and Home & Garden businesses. That said, we will remain disciplined in our approach, and we will only act when the right opportunity presents itself at the right value. Our balance sheet strength gives us tremendous flexibility to move decisively when the time is right. Lastly, on the HPC front, our partnership with Oaktree is progressing well, and we are excited about what lies ahead.

The foundation has been laid, and we are beginning to chart the path forward together. There are a number of potential exciting opportunities to create the right structure to maximize value at HPC. We look forward to sharing more progress with you as this relationship matures. If everybody could turn now to slide eight, and I'll cover the high-level fiscal 2026 earnings framework. We continue to expect our net sales to be flat to up low single digits versus the prior year, and that's driven by growth in Global Pet Care and Home & Garden, which are more than offsetting an anticipated decline in our Home & Personal Care unit. In light of our year-to-date performance, however, we are updating and increasing our EBITDA expectations.

Excluding the impact from tariff refunds, we now expect adjusted EBITDA to increase mid-single digits versus the prior year, reflecting the underlying strength of our core businesses and our continued discipline around expense management. Consistent with our prior framework, excluding tariff refunds, we continue to expect adjusted free cash flow to be approximately 50% of our adjusted EBITDA. Before I turn the call over to Faisal, I'd like to sincerely thank each member of the Spectrum Brands team. Your commitment, your execution, are reflected in these very results. As we enter the final stretch of the year, I'm confident we'll finish strong and we'll continue delivering value for our shareholders. Now you'll hear more from Faisal on the financials, and he'll give you some more business unit insights. Over to you, Faisal.

Thank you, David. Let's turn to slide 10 and review our third quarter financials, starting with net sales. Net sales increased 7.7%, excluding the impact of $7.5 million of favorable foreign exchange, organic net sales increased 6.6%. All three businesses delivered growth in the quarter, led by our Home & Garden business, where favorable weather conditions drove point-of-sale consumption with our key brands continuing to outperform the market. Gross profit increased $106.3 million, and gross margin of 49.2% increased 11.4 percentage points, including a one-time tariff refund of $60.6 million. Excluding this benefit, gross profits increased $45.7 million, and gross margin of 41.1% increased 330 basis points, driven by higher sales volume, pricing, lower trade spend, favorable mix, and cost improvement actions, partially offset by higher tariff cost.

Operating expenses of $354.5 million increased by 52.3%, including an impairment charge recognized in the current quarter for the HPC business related to the recent transaction with Oaktree. Excluding this impairment charge, operating expenses increased $25.5 million, or 11.3%, largely attributable to increased investment spend. Operating income of $15.9 million decreased by $15.4 million, driven by the higher operating expenses, partially offset by the gross profit increase I mentioned. GAAP net income and diluted earnings per share both decreased, primarily driven by the lower operating income and higher income tax expense. Diluted earnings per share benefited from a lower share count. Adjusted EBITDA was $158.3 million, an increase of $81.7 million. Excluding tariff refunds, adjusted EBITDA was $97.7 million, an increase of $21.1 million or 27.5%.

Driven by the improved gross margin and increased volume, partially offset by the higher investment spend. Adjusted diluted EPS increased to $2.79, driven by the higher adjusted EBITDA and a reduction in share outstanding, including a $1.90 per share benefit from tariff refunds. Excluding this benefit, adjusted EPS decreased to $0.89. Turning to slide 11, our Q3 interest expense from continuing operations of $8.2 million decreased $200,000. Cash taxes during the quarter resulted in a net refund of $1.3 million, a decrease of $15.3 million from the prior year. Depreciation and amortization of $24.8 million decreased $300,000 from last year. Separately, share-based compensation increased to $6 million from $4.8 million in the prior year. Capital expenditures were $9.8 million in the quarter, which is $200,000 lower than the prior year.

Cash payments to our strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments were $7.4 million, versus $8.6 million last year. Moving to the balance sheet, we had a quarter-end cash balance of $258.9 million, and $494.8 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $633 million, consisting of $496.1 million of senior unsecured notes, $76.9 million of finance leases, and $60 million of HPC term loans. We ended the quarter with $374.1 million of net debt. Now let's get into the review of each business unit. I'll provide you more details on the underlying performance drivers of our operational results. I'll start the business reviews with the Global Pet Care business, which is slide 12. Reported net sales increased 3.3%, and excluding favorable foreign exchange, organic net sales increased 2.9%.

Reported net sales in companion animal increased mid-single digits, while sales in aquatics decreased mid-single digits. In North America, sales increased high single digits led by strength in companion animal with modest category growth and continued market share gains across our key brands. Our top brands across chews, stain & odor, and grooming all maintained or gained market share in the quarter. Sales also benefited from a softer prior year comparison, stemming from the temporary suspension of shipments to key retail partners during pricing negotiations, which deferred orders from Q3 to Q4 of last year. Results were also partially offset by an approximately $3 million headwind from e-commerce orders shipped early into the prior quarter. Organic net sales in EMEA decreased in the mid-single digits, including an approximately $6 million headwind.

Driven by retail partners accelerating orders into the prior quarter ahead of our March 30th S/4HANA go-live, impacting both companion animal and aquatics. Excluding this timing impact, underlying performance across both companion animal and aquatics was strong. In companion animal, Good Boy continues to outperform the competition, driven by distribution gains across Continental Europe and expanded market leadership in the U.K. In aquatics, we gained market share within a declining category, where the e-commerce channel delivered strong year-over-year gains. Our commercial and go-to-market strategy remains rooted in consumer-led innovation, supported by targeted marketing and advertising that speaks directly to today's pet owner. A key pillar of this strategy is our evolving digital approach as we work to build a social-first marketing machine that meets consumers where they are.

Most notably, we recently launched TikTok shops for both our Good 'n' Fun and DreamBone brands, a first for our GPC portfolio, creating a direct and engaging path to purchase in one of the fastest-growing social commerce platforms. Complementing our digital efforts, we are executing numerous media campaigns focused on driving increased brand awareness and engagement. Lastly, on the revenue growth management front, you may recall last quarter, we shared that we were in the process of refining our price pack architecture across much of North American business. With the initiative now fully executed, we are actively supporting our portfolio value proposition and remain focused on reinvesting appropriately behind our brands and innovation pipeline. Turning to EBITDA, excluding tariff refunds, this quarter's adjusted EBITDA for the business was $51.9 million.

An increase of $7.9 million versus the prior year, with adjusted EBITDA margin expanding 250 basis points to 19.7%. The improvement was primarily driven by pricing, favorable mix, and cost improvement actions, partially offset by higher tariff costs and investment spend. As we look forward to the fourth quarter and conclusion of the fiscal year, we continue to expect to deliver top-line growth for fiscal 2026 in the GPC business, reflecting the underlying momentum across our key brands and markets. Our year-to-date performance has been strong. We are confident in our brands' ability to continue gaining share in the marketplace. In the fourth quarter, however, we anticipate sales will be down versus the prior year.

Driven by tougher comparisons related to both the stopped shipment dynamic discussed earlier and Eukanuba order timing as retailers pulled purchases forward in the fourth quarter of prior year in support of a refreshed portfolio launch. We expect investment spend to remain elevated relative to the first half as we reinvest margin gains from our pricing decisions back into the brands in support of long-term growth. Let's move to our Home & Garden business, which is on slide 13. We delivered a record quarter with reported net sales of $225 million, an increase of 19% versus the prior year, surpassing even the elevated demand levels we experienced during the COVID-19 pandemic. Growth was broad-based, with double-digit gains across all pest controls and herbicide categories.

Favorable weather conditions across key regions in April drove strong retail point-of-sale activity and higher replenishment orders early in the quarter. While weather turned unfavorable in May, with pockets of severe weather and excessive heat across the Eastern U.S., our April momentum and the underlying strength of our brands enabled us to deliver a record quarter despite these challenges. Notably, most of our key brands once again outperformed the market, including Spectracide, Hot Shot, and Repel. The strength of our sales is a direct reflection of our continued investment in innovation, consumer-relevant marketing, and strong retail execution. Spectracide's non-selective lineup of fast-acting, ready-to-use formulas to address unwanted weeds and grasses is winning in the marketplace with enhanced efficacy claims that are resonating with consumers at a superior value.

In addition, the innovations brought to market last year continue to drive growth through expanded distribution. The Spectracide Wasp, Hornet, and Yellow Jacket Trap, along with the Hot Shot flying insect traps, are outpacing the market through significant footprint expansion supported by strong media campaigns. Off-shelf displays continue to be a core part of our strategy, and we secured numerous promotional end cap and aisle displays with many of our retail partners. In our cleaning category, we recently launched the Rejuvenate PowerMax Multi-Surface Mop, a three-in-one sweep, mop, scrub floor care solution built around consumer convenience and superior value. While distribution is in its early stages across select online and brick-and-mortar retail partners, we have additional placements already confirmed with rollouts underway.

Turning to EBITDA, excluding tariff refunds, adjusted EBITDA was $48.4 million, an increase of $9.8 million versus the prior year, an adjusted EBITDA margin of 21.5%, representing 110 basis points improvement year-over-year. The increase in adjusted EBITDA was primarily driven by the higher sales volume and productivity improvement, partially offset by higher trade spend and inflation. The additional cost of tariff was largely mitigated through a variety of actions, including pricing. Looking ahead to the balance of the fiscal year, while our Home & Garden business delivered a record-setting quarter, the demand variability we experienced within the quarter tied to shifting weather patterns is a reminder that weather plays an important yet unpredictable factor in our overall performance. The unfavorable weather conditions experienced in late June continued into July, with more widespread and persistent heat impacting much of the country.

Hey, thank you, Faisal. Once again, I just want to thank everybody for joining us on the call today. I'll take a few moments like I normally do, just to recap some of the takeaways. The key takeaways will be on your slide 18, I believe. Look, we're pleased with our third quarter and our year-to-date results, and they're marked by a number of significant, meaningful milestones that I mentioned earlier. These things reinforce the effectiveness of our strategy. All three businesses delivered top-line growth in the quarter, and we did this despite the continued volatility in the broader macroeconomic environment, including the geopolitical tensions that persist, an evolving trade environment, and uneven consumer demand across certain categories and regions.

In Global Pet Care and Home & Garden, our brands continue to perform well in the market, with consistent share gains across much of our portfolio. In Home & Personal Care, we're seeing signs of stabilization in the North American market, along with continued brand strength across Latin America. As for profitability, all three businesses expanded adjusted EBITDA margins in the quarter, excluding tariff refunds, a direct reflection of the cost discipline we continue to exercise across our organization. If I look forward to the balance of the year, we're focused on finishing strong, executing against our strategic priorities and continuing to invest in our brands and delivering on the updated framework we just gave you today. Our fiscal fourth quarter will not be without its challenges. Unfavorable weather conditions are weighing on Home & Garden's final season.

The Global Pet Care business faces tougher prior year comparisons, as we've talked about, and the consumer and inflationary pressures remain. That said, we are pleased with the underlying performance of our brands, and we remain confident in this team and our ability to close out fiscal 2026 strong with the same discipline and determination that has defined our performance throughout the year. Lastly, I believe the future for our company and Spectrum Brands is bright. We will continue to build and look for attractive opportunities in the M&A market, but we are looking for the right complementary assets to build upon the strength of our Global Pet Care and Home & Garden portfolios. We will remain disciplined. We will only act when the right opportunity presents itself to us.

On the HPC front, our partnership with Oaktree is progressing well. We're excited about what lies ahead. There are a number of potential exciting opportunities to create the right structure to maximize value at HPC, and we're looking forward to sharing more progress with you guys as that relationship matures. Before I turn the call over, I want to take this last moment to thank every member of the Spectrum Brands team around the world. The results we delivered this quarter reflect your grit, your determination, your focus, and your commitment. I'm confident that together we'll finish this year strong. Now I'll turn the call back to Jen, and we're happy to take any questions.

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