Earnings Call Transcript
Spectrum Brands Holdings, Inc. (SPB)
Earnings Call Transcript - SPB Q2 2022
Operator, Operator
Good day, and thank you for standing by. Welcome to the Q2 2022 Spectrum Brands Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. It is now my pleasure to turn the call over to Mr. Jeremy Smeltser. Please go ahead.
Jeremy Smeltser, CFO
Thanks, Rain. Good morning, everyone. Thank you for joining us. Welcome to Spectrum Brands 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 a 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 two 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.
David Maura, CEO
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 foreign exchange and acquisition, increased 2%. Despite another difficult quarter battling inflationary pressures, I am 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 pricing actions. However, our gross margins improved 260 basis points versus the first-quarter results 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. Just to put that in perspective for everyone, if you can recall, our continuing operations EBITDA in fiscal 2021 was about $390 million. 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 am extremely pleased with our team's ability to navigate that amount of inflation in a short timeframe; in my opinion, this is truly remarkable. It is honestly great to have a challenging first half behind us and to be looking out toward much improved expected performance in the second half. I couldn't be more proud of our operating teams for navigating this inflationary environment. On the strategic front, I am 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 & 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 separation of Home and Personal Care 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 HPC 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 a mid-single-digit range. As a reminder, this outlook includes just over seven months of the Tristar acquisition, and it does not include the benefit of the peak holiday season for fiscal '22. There are two 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. Two, adverse weather and the late start to the home and garden season so far this year could negatively affect full-year home and garden sales and EBITDA. With the impact of these two 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 plan to continue 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. We expect to significantly accelerate share repurchase activity once the HHI transaction is closed. Additionally, 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. 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 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 our businesses have been facing. I would also like to thank our global employee partners and the management team for their tireless efforts in the face of many challenges this company has faced over the past several years. The team's success continues to demonstrate our winning culture and the successful adoption of our global operating model. Now, you'll hear more from Jeremy on the financials. I'll turn the call over to you, Jeremy. Thanks.
Jeremy Smeltser, CFO
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. 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. 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 5.2 times compared to 4.7 times at the end of the previous quarter as 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 includes the impact of business interruption in Russia, in addition to the impact of seven-and-a-half 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 pressures. 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. 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 2.5 times. After the full deployment of the HHI proceeds, we are targeting 2 to 2.5 times net leverage for our long-term target. Now, over to Randy for a more detailed look at our operations and business unit results.
Randy Lewis, COO
Thanks, Jeremy, and thank you all for joining us again this morning. I'll review our second quarter operational 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, continued to persist throughout the quarter. As we 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 chains 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 continues 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 that most of that incremental cost will 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. 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 a challenging operating environment. Now, let's dive into the specifics for each business. I'll start with Home and Personal Care, which is Slide 15. Reported net sales increased 6.1%, while 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 Tristar with our legacy HPC business, and the team is very excited about the prospect of unleashing the combined potential of these two 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 number-one 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 are very excited about the new product pipeline, which now includes great products like the PowerXL dual neutral sealer. It's an innovative handheld FoodSaver vacuum sealer with patented double-seal technology. It was just launched with a strong consumer direct-to-consumer marketing campaign through TV and social media and is doing extremely well. The launch of our Russell Hobbs attentive collections in international markets is helping us achieve growth in the breakfast category. The recent launch of our new Steam Genie, two-in-one iron and steamer is driving growth in the garment care segment, furthering our leadership there. Our consistent commercial wins over the last two 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 offset by earlier waves of pricing in the first half of the year. The good news is that most 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 remains strong, but our ability to deliver product continues to be challenged. Despite these challenges, the Pet Care business delivered reported organic net sales growth of 5% and 2.5% respectively. Higher net sales were attributable to strong growth in companion animals, 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 re-establish 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, 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 are indicative of the long-term stickiness we believe exists 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, providing a good indication of the overall health and long-term outlook of the fish-keeping 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 incremental pricing actions, as we had previously communicated. Almost all of our planned pricing we discussed on the previous call has now been completely accepted by our customers and is currently in 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 expect to 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 executing our strategy, which is centered around inspiring trust through the delivery of unique and innovative products to drive demand for our portfolio of leading brands. Finally, for Home and Garden, which is Slide 17, reported 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 point-of-sale during the quarter and caused customers to pause inventory builds. The weather had an adverse impact on foot traffic at key retail customers, leading to slower-than-expected sales in both pest control and cleaning categories. Net sales were 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 tell our story around the brands of Spectracide, Hot Shot, Cutter, EqualLogic, and Rejuvenate. We've also recently completed a brand refresh for our Cutter and EqualLogic brands, which has 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 new product portfolio. This year, we are particularly excited about our weed and grass killer products; one-hand operated Flip & Go sprayers and AccuMeasure concentrate products that are now shipping into the market. These innovations and our go-to-market strategy have led to significant distribution gains for the current lawn and garden 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 in this 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 in the fundamentals of the category for the current and future years. Our Home and Garden business is very well positioned for success within that category. 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 for the progress we've made on our operating model, cultural advancements, and our strategic initiatives. Thank you. And now, back to David.
David Maura, CEO
Alright. 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 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. That business is going to be focused on Pet Care and Home & Garden consumable products. The HHI divestiture continues 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, a powerful portfolio of leading brands in the home and personal care appliances space. Second, our business fundamentals remain generally solid. We continue to post sales growth despite all the supply chain challenges as our investments in marketing and new product innovations translate to 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 in 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. 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 new product launches. I want to reiterate our commitment to managing our businesses for long-term success. I am proud of the way the teams have 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. I want to close by saying thanks again to our employees who are successfully navigating our company 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.
Jeremy Smeltser, CFO
Thanks, David. Randy, you want to go ahead and kick off our Q&A process, please?
Randy Lewis, COO
Sorry, I was on mute. Your next question comes from Bob Labick from CJS Securities.
Bob Labick, Analyst
Hi, thanks for the details. I'd like to discuss your strategy regarding inventory. In the last call, you mentioned how you're building inventory to address supply chain issues. Can you elaborate on your current inventory status and how it allows you to meet high demand in specific areas? Additionally, how has this inventory buildup benefitted you so far, and what is your outlook?
Randy Lewis, COO
See, Bob, I would say, overall, we've made material improvements in our fill rates in the aggregate over the course of the quarter, predominantly driven by the continued investment in inventory. However, there are pockets where both the demand and supply continue to be acute issues. The biggest issue for us is in our Global Pet Care business where we have discrete issues related to some Vietnam and Cambodia supply of chews and treats that we're still battling, as we've discussed over the last couple of quarters. And that's going to linger for us for a while, but it's getting better every week. We're happy to have the solutions in place. 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. I would say, generally, in most other areas of the businesses, the inventory levels are getting closer to where we want them to be.
Bob Labick, Analyst
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 full price parity, for lack of a better term, what's the margin outlook with Tristar? And 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?
David Maura, CEO
Yes, Bob, I'll take that. I think at the outset of the call, I kind of said - - hey, it's tough to report another quarter when 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 six months trying to fix margin structure, and we believe we've got that accomplished now here in the third quarter. So, I think it's not just HPC, but it's basically all the different business units should start to see some margin expansion as we move forward here. I’m looking at our internal numbers and I see a pretty significant margin expansion for HPC as we get into the current quarter, and then it expands a lot more into the fourth. I think you could expect us to return EBITDA margin to the high-single digits as we get toward the back half of the year. And I think — look, I think the low-double digit number is kind of — on the EBITDA margin line, where HPC should kind of fall out.
Bob Labick, Analyst
Okay, great. That's super and exciting. So, thank you for that. And then 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 ASSA and you have hundreds of things on your plate. But you're also going to have tons of cash. And so, what is the outlook for potential of the tuck-in brands and valuations become more reasonable or how are you thinking about that?
David Maura, CEO
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. I obviously know the risks in our business better than I know the risks of a platform that we would acquire. Again, our priorities would be the day we close as a big debt pay down, and it's 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. I am 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 re-underwriting the business, really looking at where our strengths, weaknesses, opportunities, and threats are, and also looking at the competitive set to try to figure out where my blind spots might be, where the hockey puck is going to be three to five years from now. We want to present to the Board in November kind of our outlook for building back to kind of a $5 billion-ish revenue — billion in a quarter plus EBITDA pure-play pet home and garden company. That’s where we're trying to navigate the ship here, and I think it would be prudent for us to do some deep dives and spend three to four 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. 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, want to shrink the flow, and hopefully, sellers' expectations come down while we're getting smarter; would be my answer to that.
Operator, Operator
Your next question comes from Steve Powers from Deutsche Bank.
Steve Powers, Analyst
Good morning. So, first is 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'd 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'd be great.
Jeremy Smeltser, CFO
Sure. Yes, cash restructurings come in a little bit heavier given all the things that Bob mentioned in his question. We have a lot of activities going on in the business; planning to separate HHI, and planning on HPC. 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...
David Maura, CEO
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. 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. 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 will pay us significant dividends in '23, '24.
Steve Powers, Analyst
Okay. So, the synergies, you think you can capture pretty quickly as you look at '23?
David Maura, CEO
Well, look, I would tell you that the next two months are going to be a lot of heavy lifting. I was just in Middleton for a week. We've got teams all over the globe, and this is a big global business. There's a lot of work streams. The next 60 days will be heavy lifting here. It's just — look, as I look to separate the business out and create an independent entity, it will be much better served, in my opinion, investing heavily now to create a stronger earnings stream as it becomes a standalone entity in future years. So, that's really what I'm trying to say.
Steve Powers, Analyst
Okay. That's fair enough. Okay. And then my another question would be you mentioned the sort of the building cost pressures post-Russia-Ukraine that probably start to impact you more so exiting '22 into '23. But then you also talked about some of the macro headwinds and fluctuations that are impacting top-line consumer demand at some of your businesses. So as you think about that, 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?
David Maura, CEO
Look, I think what I really hope people take away on this call, I'll re-underline it. This is a company that, excluding HHI, had about $390 million of EBITDA last year. That RemainCo has had to price for over $400 million. We've had to replace the entire earnings power of the company in the last 18 months. 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. What we're trying to say is, we're trying to be completely transparent on our base EBITDA of the core. This Russia-Ukraine thing happened recently. It's unfortunate. We've tried to be as good a steward of our human capital there as possible and moved 34 people out of Ukraine, but we've had to stop sales into Russia. 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. I don't see the ability to kind of make that up with less than five months to go. I certainly don't want to cut marketing spend to kind of make a number. That's the situation there. I think small kitchen electrics is where you're going to see six dollars a gallon start to hurt discretionary income, and people bought a lot of those products during COVID. That's where you see the sales headwind developing the most in the current economic situation. I'm not here to tell you that pet supplies are completely inelastic, but I'm happy with our pricing power in Pet and Home & Garden. I believe that people are going to continue to enjoy their pets and stay around their homes. We believe that side of the equation keeps a stronger demand outlook and recent POS confirms that. We're pretty bullish there. I think what we're trying to say on Randy's comments about global supply chain is, our Pet demand remains really high. We've struggled with a few of our suppliers and now, as we sit here in this conference call, that inventory is in the ports. It's hitting our DCs. 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. We see a pretty good demand picture in Pet for the balance of the year.
Steve Powers, Analyst
No, that helps. It gives me some context, so I appreciate it. Thank you, both.
Jeremy Smeltser, CFO
Thanks, Steve.
Operator, Operator
Your next question comes from Peter Grom from UBS. Your line is open.
Peter Grom, Analyst
Good morning, everyone. I hope you're all doing well. I wanted to ask about both the HHI transaction and the HPC separation. First, I know you mentioned that you still expect the deal to close this year, which is consistent with the improvements seen since December. Do you have any more specific timeline details? Eight months is quite a broad time frame. Regarding HPC, you noted in the release that groundwork is being laid for a separation. I’m curious about your current thoughts on how you plan to approach that separation, whether through a sale, IPO, or a joint venture. Thanks.
David Maura, CEO
I mean, look, 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'm hoping I can have a lot more clarity there.
Peter Grom, Analyst
Okay. Now, that's super helpful. And then I guess — I wanted an update perhaps around the organic sales outlook. And I know you mentioned Home and Garden weakness as kind of one of the primary reasons for the slightly lower core EBITDA guidance and maybe we're mis-modeling the impact from Tristar. But the updated sales outlook, does it really seem to imply a meaningful change to the organic sales outlook you provided last quarter? So, maybe just first, is that right? And if so, kind of what are the positive offsets there, allowing you to maintain that outlook?
Randy Lewis, COO
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, it is not a lot of net sales impact there. As you look at the quarter, with certainly less sales on the table and 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. In Home and Garden, I would say, versus our original expectations to start the quarter, while we did have some growth, that's actually the lightest performance we would have expected for that business this quarter, based on retailer sentiment toward this season. Early in the quarter, I would say, our retail customers had some challenges with transportation, and they had some issues. By the time those were recovered later in the quarter, we experienced here, in the Midwest, a pretty wet and cold season, all the way through March, including in April. That just had retailers delay additional purchases. We're still excited about Q3, excited to see the weather pick up. It 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 Q3 and in Q4. We certainly have invested appropriately, partnering with our retail customers on having the right inventory in the right places.
Operator, Operator
Your next question comes from Chris Carey from Wells Fargo.
Chris Carey, Analyst
So, I just wanted to build on that and just ask in a similar way, but I was trying to understand basically what you are embedding for the rest of the year from a supply chain improvement perspective, specifically PET, on the aquatics business? And then the other question, which is being 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 in Q3 as well? I'm just — I'm trying to frame — I appreciate the guide coming down. It's a little bit underlying and you're going to have some catch-up going into 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.
David Maura, CEO
I'll take the top line on this, and then the guys can add further color. Look, we expect a really meaningful recovery to Pet. We're getting a lot of inventory into the ports that is flowing into our DCs as we sit here doing this conference call. We are really looking to get our fill rates materially improved there in Q3 and Q4. We are looking to have a very big back half impact, and that's why I'm excited to look forward here as we finish up this conference call. Home and Garden is so seasonal that if we had a really great week in May, it could make up for the entire month of February. It's literally that pronounced. We could make our original guidance. We're just sitting here saying to you, hey, it's cold and wet outside. We don’t want to over-promise and under-deliver. Based on everything I know today, this is our best guess, given the late start to the weather pattern. But I will tell you this: I love our shelf position, I think we're taking market share, consumers love our brands, and we’ve turned Spectracide into the number-one pest control product in our channels. Our teams are excited and we've got a lot of R&D coming.
Jeremy Smeltser, CFO
Hey, Chris. I want to clarify on Pet. Aquatics is doing well, and we're mostly vertically integrated there, so inventory is good. However, consumer demand has decreased a bit following last year's surge in aquatics spending. The issues are mainly with our outsourced chews and treats from Vietnam and Cambodia. As you may remember, towards the end of our last fiscal year, we had some suppliers shut down for three to four months, and those are some of our fastest-moving products. Our safety stock is being depleted quickly. The good news is that those suppliers have been back online for the past two to three months.
Randy Lewis, COO
Yes, we've been ramping up over the fiscal Q1 and into fiscal Q2, where we've added substantial incremental capacity. So right now, we're actually producing at a rate about 150%, 160% faster than we could have produced a year ago, but it’s just taking a while to get that in.
Chris Carey, Analyst
Okay. That's all very helpful. And just that — Yes, that was great. Yes, just one quick follow-up on...
Randy Lewis, COO
A little clarity on the aquatics from me. We're seeing the softness in the hard goods environments, things like tanks and equipment. 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 within the category, we continue to see that holding solid demand. The people that have entered the category over the last couple of years may not be expanding a lot, but they're staying in. That's great for us.
Chris Carey, Analyst
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 re-accelerate kind of like post-investments, or are there other — is there other work going on to kind of separate the systems to 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 around the separation of that business. Thanks so much.
David Maura, CEO
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 will be done early this summer. It’s imperative that we get this integration right. It's imperative that we set this company up to succeed. That's why we're taking actions over the next couple of months to really get this thing integrated and homing as one new company. 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.
Operator, Operator
Your next question comes from Nick Zaffino from Oppenheimer.
Nick Zaffino, Analyst
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 year-to-date inflation is? I'm just trying to ferret 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'd be helpful.
Jeremy Smeltser, CFO
Yes. Depending on the volume in the quarter, because we have a little seasonality in HPC and in home and garden, obviously, as we've discussed, but it's in the $80 million to $85 million run rate per quarter, give or take. It should remain that way, I think, in the second half of the year.
Nick Zaffino, Analyst
Okay. So, that basically assumes that there is just flat inflation going forward, or that every quarter you're going to see an incremental $85 million versus the year before?
Jeremy Smeltser, CFO
Yes, the only area that we have seen potential increases, and Randy 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. As you can imagine, there is 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. 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. 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. We feel like we're positioned pretty well. 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 challenges with Russia-Ukraine.
Nick Zaffino, Analyst
Okay. Great. And then as a follow-up, can you maybe just talk about how you think the businesses might perform in a downturn — in an economic downturn? I mean, historically been very much of a kind of a replacement product. I mean, the portfolio has changed since purchase in the last recession, but can you maybe give us kind of a framework on how to think about how the business may perform? Thanks.
Jeremy Smeltser, CFO
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 are actually a little bit better dynamics right now as the world reopens. The most important thing to do is focus on Global Pet Care and Home & Garden. Those combined businesses are 90% consumables and they move pretty quickly. We have a good customer base in Global Pet Care that we expect will continue to spend on their pets. That's what I think the macro trends tell us globally. In home and garden, I think it's very defensive, right? The concept of moving to the South with longer seasons, people living in HOAs where their yards must 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. I really like how we're positioned.
Nick Zaffino, Analyst
Great. Thanks for the color.
Jeremy Smeltser, CFO
Thanks, Nick. I think, Rain, we'll take one more call.
Operator, Operator
Sure. Your last question comes from Carla Casella from JPMorgan.
Carla Casella, Analyst
Great. I made it at the end of the pyre. A couple of questions. One, on the cutback in CapEx. Is that just driven by the fact that you're running below kind of run rates year-to-date, or did you delay any projects there?
Jeremy Smeltser, CFO
Yes. I mean, we've cut a couple of small projects. We're in areas where we see volume declines, but the predominant is really just timing of our SAP investments shifting a little bit into 2023.
Carla Casella, Analyst
Okay, great. And then on the cost side, the inflation. Is there anything you can hedge, or can you talk about on the ocean freight side? As you mentioned, you're contracting on additional capacity. Are you seeing those rates spill two times to three times or more above 2020 levels? And do you have to lock those in, and what's your thoughts there?
Randy Lewis, COO
Yes. Carla, this is Randy. I would tell you, on ocean freight, the spot rates have come down off of peaks from earlier in the calendar year a little bit. The ocean freight contract opportunity is, of course, I think we all agree that in two years from now, three years from now, rates should be dramatically different. 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.
Carla Casella, Analyst
Okay. And the other inflationary items, can you hedge any of that or can you say, like, how much of your COGS there are items that are the most defensive? Like, I'm guessing, Pet or any other key items?
Randy Lewis, COO
Yes. Look, from a market perspective, there is — 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.
David Maura, CEO
Carla, it's Dave. I — 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. Where I sit today is, I'm pretty thrilled with what we've done on the pricing side. As I look at freight, the price has gotten super frothy. They’ve come off a little bit. They’re stable here. They’re not coming down as much as we'd like. I think given what I see on the durable side of the economy, there’s going to be a decent amount of demand destruction as we go through the summer with gasoline prices and where we see cost of money going. I actually think freight rates are going to come down significantly, as you get into '23. That’s my personal view. We’re going to contract for capacity with 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 and 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. This is all part and parcel with the portfolio reshaping that we're doing. We’re just excited that 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 that we've gotten the boat off a plane, and we’re running pretty good right now. I’m excited about the back half.
Carla Casella, Analyst
Okay. That's great. And I just have one follow up on them. So, I'd love that you put out your leverage target or holding that leverage target 2 to 2.5 times, a little over five times today pro forma. So, do you have a timeframe for how long it might take to get you this take? And what does it take the HHI sale to pay down and Tristar synergies? Will you get there right after you sell HHI and pay down debt?
Jeremy Smeltser, CFO
I think we'll get there pretty quickly after closing the sale of HHI.
David Maura, CEO
Like 24 hours after.
Carla Casella, Analyst
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?
Jeremy Smeltser, CFO
Yes, we haven't yet. So, that was a gross in the near term. Look, we have a good slug of prepayable debt out there now, and we have a couple of years' worth of callable bonds. We’re pretty flexible on being able to head in that direction. We'll have more color once we actually get near closing.
Carla Casella, Analyst
Okay. Great. We look forward to that.
Jeremy Smeltser, CFO
Thanks, Carla.
David Maura, CEO
Thanks, Carla.
Jeremy Smeltser, CFO
Rain, 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 any questions you may have. Thank you. Have a great day.
Operator, Operator
Thank you. And this concludes today's conference call. Thank you all for joining. You may now disconnect.