Earnings Call Transcript - SPB Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Spectrum Brands Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today Kevin Kim, DVP of Investor Relations. Thank you. Please go ahead.

Kevin Kim, DVP of Investor Relations

Great. Thank you, Angie. Welcome to Spectrum Brands Holdings Q3 2020 earnings conference call and webcast. I'm Kevin Kim, DVP of Investor Relations and moderator for today's call. To help you follow our comments, we have placed a slide presentation on the Event Calendar page in the IR section of our website at www.spectrumbrands.com. This document will remain there following our call. Starting with Slide 2 of the presentation. Our call will be led by David Maura, Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis Chief Operating Officer. After their opening remarks, we will conduct the Q&A. 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 today July 31, 2020 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 filings, which are both available on our website in the Investor Relations section. I will now turn the call over to David.

David Maura, Chairman and CEO

Hey. Thank you, Kevin. Good morning, everybody. Thanks for joining us today for our third quarter call. Before we turn our attention to the company's third quarter results, I want to say again thank you to all of our employees. We've got over 11,000 employees around the world. And to all of our frontline workers in our factories and distribution centers. I'd like to say thank you. You are the true heroes of our company. Your sacrifices reaffirm Spectrum Brands' new identity as a true home essentials company. Because of you, we're innovating, marketing and we're bringing joy and happiness to our consumers worldwide. Whether it's in the kitchen, the yard, around the house, or with your pets; we are delighted to make life better and more enjoyable for our consumers of our products and services throughout the planet. Turning to Slide 6. Our results this quarter reflected strong demand that accelerated throughout the course of the quarter. Simply put, we have embraced our position as a home essentials business and instead of pulling back in the face of the COVID-19 challenges, we are continuing our drive to add talent, create new innovative products and improve our operating model. In addition, just in the last 60 days and ramping up in the current quarter, we have committed to significant increases in our advertising investments to meaningfully accelerate the long-term organic growth of our company. The actions of our Spectrum Brands family reflect resilience and operational excellence in this ever-evolving environment. This includes adopting safety protocols in response to COVID-19, navigating temporary government-mandated factory closures that have impacted our hardware home improvement businesses, and balancing strong underlying demand including large mix shifts. The temporary COVID-19 related supply disruptions from our HII division negatively impacted results this quarter. But we believe the situation is largely resolved and supplies are expected to be caught up by our first fiscal quarter. Furthermore, our global productivity improvement plan savings positively impacted each of our core businesses in the third quarter. As we indicated earlier in the year, these savings are now beginning to outweigh the headwinds from the annualization of tariffs, which we expect to be an incremental $70 million in this fiscal year. We continue to expect GPIP to generate at least $100 million of full run-rate cost savings over the next nine to 12 months. To be frank, I continue to be very excited about our global productivity improvement programs. The impact of this critical strategic initiative is evidenced more and more every day with our employees and increasingly more with our customers and investors. The savings across procurement initiatives and operating model improvements are driving real benefits aiding our commitment to deliver sustainable organic growth by balancing these savings with reinvestments and allowing us to plant the necessary seeds back into our businesses to grow our most promising brands. In fact, we are doing just that. As a home essentials company, our products revolve around the home. Aided by our commercial operations team, we've quickly pivoted to ensure our new products and incremental advertising investments resonate with consumers spending more time at home. Since the initial change in consumer behavior back in March, our business units worked together as one. To recognize, adapt, and lean into the spike in at-home trends that are positively impacting all of our businesses. We believe this trend is a sustainable tailwind to drive growth and repeat purchases as consumers spend more time at home. Starting in our home and garden division and our home and personal care unit, and expanding during the July 4th holiday across all the other business units, we have approved about $20 million of incremental advertising spend that will continue into the first half of 2021. We expect these investments to drive returns from the George Foreman Smokeless Grill to the Spectrum side in new homing, just to point out a couple. Again, instead of pulling back, the company is leaning in. We are investing and we are expanding. From a balance sheet perspective, we continue to be focused on liquidity and a strong balance sheet. On June 30th, we strategically refinanced our existing $890 million cash revolver and replaced it with a new five-year $600 million revolver and a $300 million 10-year senior secured note due in 2030. This leverage-neutral transaction allowed us to maintain a very strong liquidity position while extending the maturity profile of our debt and locking in favorable pricing. Also during the quarter, we opportunistically sold 1.1 million shares of our Energizer common stock holdings for proceeds of about $50 million, and we ended the quarter with a 3.1 million share position in Energizer. If I could have you turn to Slide 7 now, please. The third quarter results represented that three of our four business units generated healthy organic growth, and despite COVID-19 related challenges, our global team generated financial performance that was consistent with the prior year. Importantly, our e-commerce business continued to generate exceptional growth across all the businesses with sales up 44% compared to the prior year and now representing approximately 16% of our base business. Total demand remains strong, with July net sales up across all business units. Our future is bright as a home essentials company; we believe we remain well-positioned financially and operationally to drive long-term sustainable organic growth. Turning to Slide 8, I'd like to take just a few moments to look back over the past 90 days and share some comments from our last earnings call. If you remember, I concluded my second quarter prepared remarks indicating our plans to realign our supply chain to better reflect and accommodate new demand patterns; plans to continue to execute on our global productivity improvement programs, and to embrace a more consumer-driven mindset. We delivered on those expectations in the third quarter by achieving better-than-expected results in the midst of a very challenging environment. Taking another step back, in the face of incremental tariffs and COVID-19 challenges, so far this year, we have grown organic sales and adjusted EBITDA despite significant supply chain issues. While our teams are focused on finishing the year strong, our recent results demonstrate our resilience as a leading consumer staples company. We believe our laser focus on operational excellence driving efficiencies to our global productivity improvement plans and investing back in the business to drive long-term sustainable organic growth continues to point the way to a very bright future. If I could have you turn to Slide 9 in the presentation. Our employees are the absolute heroes of the story. They continue to demonstrate servant leadership across the businesses, and this includes our work to launch timely new products. The team has innovated by introducing Cutter hand sanitizer and more recently nature's miracle disinfectant. Our plans in Blacksburg, Virginia, and Melle, Germany, continue to designate part of their facilities to produce hand sanitizer and help combat the spread of COVID-19. Given the continued needs, we continue to donate these products and so far we've donated to many organizations, some of which include the St. Louis Area Food Bank, the Northwest Arkansas Food Bank, and New York City Relief, as well as many organizations around the country and the world. These products are also available now for purchase on several e-commerce sites. Turning our attention now to Slide 10, just as a reminder, our Spectrum 2020 guiding principles remain vision, clarity, and focus as we create a faster, smarter, and stronger Spectrum Brands of the future. Our vision is to be a strong innovator of great products supported by consumer insights and marketed with excellence. We are bringing clarity to the organization by continuing to simplify our business, streamlining our go-to-market strategies, and becoming a much more productive and efficient company. Our unwavering focus on best-in-class customer service is our pathway to a consumer-driven mindset across the businesses, and we accept nothing but outstanding quality and service for increasing innovation and marketing investments to drive our brand and the long-term growth of our businesses. I continue to believe the best days are ahead of this company as we work to deliver significant long-term value creation to our shareholders and produce sustainable growth going forward. Now, you'll hear much more from Jeremy on the financials and Randy will walk you through the additional business unit insights. I'll now turn the call over to Jeremy.

Jeremy Smeltser, CFO

Thanks, David. Good morning, everyone. Turning to Slide 12 and a review of Q3 results from continuing operations. Beginning with net sales. Net sales decreased 3.7%, excluding the impact of an $11 million unfavorable foreign exchange and acquisition sales of about $3 million. Organic net sales decreased 2.9% with growth in Global Pet Care, Home & Personal Care, and Home & Garden offset by a decline in Hardware & Home Improvement due to the supply challenges. Gross profit decreased $12 million, and gross margin of 35.4% increased 10 basis points despite supply restrictions due to favorable product mix and improved productivity. SG&A expense of $225 million decreased 3.4% at 22.8% of net sales consistent with last year driven by lower operating expenses and restructuring costs. Operating income growth of 1.9% was driven by lower restructuring activity, partially offset by the supply disruptions in Hardware & Home Improvement. Net income and diluted earnings per share were driven by gains on the company's Energizer common stock holding, gain from the extinguishment of stainless-steel debt, and lower shares outstanding. Adjusted diluted EPS increased 0.7% as favorable product mix, improved productivity, and lower shares outstanding were partially offset by supply disruptions from HHI. Adjusted EBITDA decreased 4.9% and adjusted EBITDA margin decreased 20 basis points. The decline in HHI was partially offset by growth from Global Pet Care, Home & Personal Care, and Home & Garden. In total, we estimated the overall impact of COVID-19 on our ability to supply product in the quarter reduced net sales and adjusted EBITDA by over $100 million and $30 million respectively. Turning now to Slide 13. Q3 interest expense from continuing operations at $36 million increased $2.2 million driven by higher debt from the revolver borrowings. Cash taxes during the quarter of $3.9 million were $3.7 million lower than last year. Depreciation and amortization from continuing operations at $35 million was $1 million lower than the prior year. And separately, share and incentive-based compensation decreased from $15.6 million last year to $14.2 million this year. Cash payments for transactions were $7.2 million, down from $11.8 million last year. Additionally, restructuring innovative payments for Q3 were $25.2 million versus $14.6 million last year. The higher cash burn was driven by GPIP. Moving to the balance sheet, we completed the quarter by building meaningful financial flexibility and a strong balance sheet including sequentially improving our liquidity position and maintaining ample flexibility on debt covenants. We had over $800 million of total liquidity, including a cash balance of $466 million and $341 million available on our cash flow revolver. Total debt outstanding was $2.7 billion and up as a result of drawing down on our revolver. Compared to the prior year, third quarter ending inventory was lower by $151 million. This was due to enhanced demand and supply delays associated with COVID-19, combined with the increased disappointment and improved process around inventory management we demonstrated in the past three quarters limiting our inventory investment. We continue to invest in capacity, automation, and consumer insights to better manage our working capital and are really pleased with the progress this year. On June 30th, we successfully refinanced our $890 million cash flow revolver with a new five-year $600 million cash flow revolver and $300 million of 5.6% senior unsecured notes due June 2030. Consistent with our comments last quarter based on the seasonality of our working capital, we generated substantial positive cash flow in the third quarter and we continue to expect substantial positive cash flow in Q4. Additionally, we sold approximately 1 million shares of Energizer's stock for proceeds of $50 million during the quarter and held just under 3.1 million shares at quarter end. Capital expenditures were $12.8 million in the quarter versus $13.2 million last year. Turning now to Slide 14 in our plans moving forward, while we have withdrawn our fiscal 2020 guidance, we wanted to spend time discussing our current market conditions. We believe our strong liquidity, which was further solidified in June, positioned us to weather the storm of the pandemic. Regarding our capital strategy, we continue to target net leverage of 3.5 to 4.0 times. We improved this metric sequentially as we ended Q3 with net leverage just below four times and we expect to end the fiscal year at the midpoint of our target range. Additionally, we continue to temporarily suspend our share repurchase program. As mentioned earlier, we are also planning for incremental advertising investments in Q4 and beyond, and Randy plans to provide more details by business unit. Lastly, demand in July remains strong with net sales up across all business units. Now to Randy for a more detailed look at our operations.

Randy Lewis, COO

Thanks Jeremy, and good morning. Thank you all for joining us today. My comments will focus on our operational performance in Q3, progress on our global productivity improvement plan, and a review of each business unit to provide you more detail on underlying performance drivers. In Q3, we continued to face COVID-19 related challenges, namely supply disruptions that threatened our ability to meet the increased demand from our customers for our home essential products. I will detail this by business unit in a minute, but first the safety of our teams has been our paramount concern for this quarter as we responded to the COVID-19 impacts on our supply chains globally. Though challenges were varied throughout the different regions of the world, we have greatly benefited from a global governance approach of our COVID-19 response team that ensured solid implementation and options of strict safety standards to protect our people and minimize the chance of COVID-19 spread within our facilities while ensuring that we abide by all government mandates. We saw similar challenges to what we faced in Q2; however, the operating environment improved the cost for each of the business units throughout the quarter. Production rates have improved sequentially over the past few months, and today, all of our manufacturing and distribution facilities worldwide are open and operating at or above the output levels from before the pandemic. We are working diligently to replenish inventory since 80 stocks, which is critical because we have a very strong order book in each of our businesses. Let's dive into the key supply chain performance of each business unit and cover the expectations moving forward. In HHI, the starting at the end of March, government shutdowns and reduced capacity mandates related to COVID-19 impacted two of our plants in Mexico and one in the Philippines. These government mandates continued into late May and limited our production capabilities. Now as a result, this clearly impacted our security category sales in Q3. In response to these disruptions, our team successfully ramped up production at third-party partners and moved work to other internal manufacturing locations where possible. However, these efforts were not quite enough to offset the impact of the temporary shutdowns. Since receiving the green lights to reopen each of our facilities, our teams have now increased capacity back to pre-COVID-19 levels or above, and we continue to push for further increases in capacity in these plants and are currently using alternative locations to help accelerate our recovery. Earlier this year in Q2, we had a few cases of COVID-19 among employees at our Home & Garden facility in St. Louis. We took swift action to mitigate potential spread. After temporarily shutting down and cleaning the facility, reviewing safety measures, we reopened successfully. Since then, we've redesigned production processes to adopt new staffing conditions that enhance worker safety. The facility has fully recovered to pre-COVID-19 output rates and is running hard to address consumer demand and retail orders reflecting strong POS levels at an extended selling season. Moving to personal care, after both sales started in April, we rebounded with very strong demand starting midway through the quarter. This positively impacted sales and low order supply levels, which were already strengthened by the shutdown of Chinese suppliers in Q2. We expect inventories of our finished goods to return to more normal levels across most of our categories by the end of Q4. Turning to Slide 17. As you heard in my supply chain review, we continue to benefit from stronger consumer demand for our home essential products. As a company, we believe we are gaining share across most of our major categories. As David highlighted earlier, our commercial teams continue to adapt to the shift in consumer environment by prioritizing our marketing efforts on our best-performing brands and well-stocked products, tying the benefits to home life, and enabling consumers to purchase them online. As a result, demand in the top line accelerated across each business unit with all HHI generating solid organic growth. Demand remains strong so far in Q4, and while we still have two months to go, we expect strong orders as our recovering supply chains replenish low inventories at many of our retail partners. Initially, our digital teams continue to leverage current data to identify consumer trends for new products and sales opportunities which read promotional content that appeals to these consumers. This quarter, e-commerce grew by more than 44%, a further acceleration from the 38% reported in Q2. E-commerce this quarter represented more than 16% of our total net sales as a company. Now, let's turn to our internal growth and efficiency efforts on Slide 18. While I can provide an update on our global productivity improvement plan, the most important aspect of this program is to drive sustainable growth in our products and brands to new capabilities and increased investments in consumer insights, R&D, and marketing. To drive that investment, we are changing to operate more efficiently and capture cost savings by harnessing our collective knowledge, power, and resources in key areas. This program continues to be our most important strategic initiative to transform into the new Spectrum Brands. The COVID-19 challenge has accelerated our progress, especially in our company culture. Our teams laid the foundation over the past year for partnership and collaboration across the enterprise. But the COVID-19 pandemic required us to work those partnerships more quickly and effectively across business units, regions, and functions. This cultural acceleration will facilitate the delivery of long-term sustainable organic growth as we continue to focus more globally on online strategies and faster decision-making. As David mentioned earlier, savings from our GPIP program positively impacted each business unit during the quarter. We continue to expect the gross savings to be at least $100 million annually, and these savings will be a full run rate within the next nine to 12 months. Much of the savings continues to be invested at the back end of growth initiatives and consumer insights, R&D, and marketing across each of the businesses. Now let's turn to a detailed performance review of each of the four business units, starting with HHI on Slide 19. Third quarter reported net sales decreased 20.6%, and organic net sales decreased 20.4%. Adjusted EBITDA decreased 35.6%, primarily driven by negative volumes and incremental cost related to COVID-19 operating conditions. Customer demand in each of the three categories remained strong and we expect a significant improvement in shipments given our order position and improving factory outputs as we progress through Q4. As we highlighted on the Q2 call, April's demand reflected certain areas of slow due to particularly new home construction. But the macroeconomic environment improved in May and June, and we expect this sequential improvement to continue into the end of the year, albeit still down a bit from prior year. Additionally, we expect to repair new model market to benefit from consumers continuing to focus on DIY projects. Looking ahead into Q4, we expect net sales to primarily benefit from the reduction of high open orders as we work to resolve the supply chain constraints from the third quarter related to the temporary order shutdowns. We also expect demand in Q4 and beyond to benefit from our new product introductions and incremental advertising investments. This includes the exciting retail launch of Halo Touch, our innovative biometric Wi-Fi enabled smartwatch which was awarded Best of CES in January this year. In addition to the smart key technology and voice assistance capability, Halo Touch not only offers homeowners and their family safe keyless entry and the ability to unlock their doors remotely with an internet connection, but also offers the enhanced at-door experience of the innovative fingerprint access technology which allows enrollment of about 50 users to be securely managed from the Kwikset app. Additionally, we have already invested in incremental advertising dollars for the Kwikset and Pfister brands. In the case of Kwikset, new TV commercials which we haven’t seen in over 10 years are running around the July 4th holiday, focusing on our Microban products that incorporate anti-microbial technology into the coding that lasts the lifetime of the lock and results in a bacteria reduction of over 99.9% versus an untreated lock. These incremental advertising investments are planned to continue in 2021, and initial indications are encouraging with tens of millions of early impressions reflecting consumer awareness of this capability. Now, moving on to Home & Personal Care on Slide 20. Reported and organic net sales increased 3% and 6.5% respectively. Adjusted EBITDA improved 37.4% to $25 million. Net sales were driven by strong growth in small appliances, partially offset by a moderate decline in personal care, resulting from COVID-19 related inventory constraints. North American sales, in particular, grew 14% in small appliances driven by mass online and discount channels. Unit growth was driven by higher volumes, mix favorability, and productivity improvements, partially offset by foreign exchange headwinds. Strong growth in the U.S., Canada, and Asia Pacific continues to reflect the broad-based turnaround momentum of our Home & Personal Care business. This quarter represented the fourth consecutive quarter of year-on-year top-line growth and the third consecutive quarter of year-over-year bottom-line growth. The targeted approach for both home appliances and personal care is driving market share gains and helping consumers with at-home meal prep and personal grooming needs in the current COVID-19 environment. Our team sees growth opportunities across cooking, food preparation, and breakfast preparation, as well as growth from shaving in Q3. This momentum continues so far in Q4. Incremental advertising investment in Q3 was focused on promoting the new George Foreman Smokeless Contact Grill, which has already launched at Walmart and enables convenient and healthier meal preparation without the mess and smoke from stove top cooking. All indications are promising, and in Q4 we plan to extend these investments for our George Foreman Smokeless Grill series, which will expand distribution to additional models and channels. We also plan to invest in exciting innovations in our Remington brand. In Europe and Asia Pacific, we will promote our new Hydrolex series, which allows consumers to achieve expert results without any heat damage. In the Americas, we will focus on our new Wet-to-Style launch, allowing consumers to save time by effectively drying and styling their hair in a single step. Our focus on fewer, bigger, and better products in this business unit is paying dividends, and we expect these investments to continue generating returns into the critical holiday period. Moving to Global Pet Care on Slide 21. Third quarter results represented a record quarter for revenue, with reported net and organic sales growth of 8.9% and 8.3% respectively. Adjusted EBITDA increased by 29.7%. Growth in companion animals was broad-based, with double-digit growth in aquatics driven by a surge in Goldfish branded live fish sales along with very strong demand for aquatic and reptile environments and systems. Higher EBITDA was driven by volume growth, productivity improvements, and positive pricing, partially offset by higher tariff costs. Q3 represented nominally a record quarter and the seventh consecutive quarter of year-over-year top-line growth and fifth consecutive quarter of bottom-line growth, despite facing difficult double-digit comparisons to the prior year. Our pet care team continues to build on our global market leadership position in our core categories of the products dogs use, pet grooming, and pet stain and odor solutions. In addition to the already strong fundamentals of this business, we are especially encouraged by the number of new pet parents who have recently entered the companion animal category, as well as the number of new hobbyists entering the aquatics and reptile categories. These are long-term commitments beneficial for future demand of our products. Lastly, the Tetra team began the integration of the Omega Sea acquisition this quarter within our existing aquatics business. This strategic position is highly complementary to our existing portfolio with untapped global growth opportunities and is already performing well despite the COVID-19 challenges to the independent pet channels early in Q3. Finally, for Home & Garden on Slide 22, third quarter reported net sales increased 4%, and adjusted EBITDA increased 4.1%. Strong POS in the quarter was driven by distribution gains, new product introductions, category growth, and favorable weather patterns. Net sales grew despite COVID-19 related supply chain disruptions. Addressing these disruptions, we improved production sequentially and worked diligently to fulfill strong demand while maintaining our focus on employee safety. The increase was primarily driven by volume growth, pricing, favorable mix, and productivity improvements despite headwinds from prior manufacturing cost, tariff costs, and our decision to significantly increase our advertising investments in the quarter. In the third quarter, which users represent about half of sales and EBITDA for the year, generated growth across each of the three categories in the Home & Garden business. Our largest brands all delivered strong performances as consumers spent more time at home, and we experienced favorable weather patterns. Additionally, we will continue to invest more advertising dollars to promote our story around Spectracide, Cutter, and Hot Shot. POS remains strong in July, with our key retailers indicating plans to continue seasonal support of the category through at least the end of our fiscal year. The fundamentals of this business remain strong; we saw profitability increase. We are confident that our strong brand equity and increased investments in product development and marketing will continue to accelerate long-term growth rates. In my section, I wanted to acknowledge another great quarter of progress on our operating culture and strategic initiatives and to thank our over 11,000 employees for all they are doing to make us proud to be a part of the Spectrum team. Now, back to David.

David Maura, Chairman and CEO

Hey, thanks, Randy, Jeremy, and everybody for joining us today. Given that we covered quite a bit on today's call, I'd like to just conclude with a few takeaways on Slide 24. First, we believe our results for the quarter and the year reflect resilience and operational excellence. Second, the future of Spectrum Brands is bright with a strong demand outlook and plans to further strengthen our balance sheet and net leverage position as we invest to drive growth. Third, demand for our products accelerated across each business unit during the third quarter as we grew organic sales across most business units, and the demand remains strong so far in the fourth quarter. Fourth, while our supply chain was challenged in Q3, we expect output and fulfillment rates to materially improve in the company's fourth quarter. We believe we are well-positioned financially and operationally to weather the storm. We will continue to be laser-focused on our employees, our consumers, and our shareholders over the long term. We want to thank you for your time, your continued support, and we wish you health and wellness as we go forward. I'll then turn the call back to Kevin. I really appreciate everyone joining us today.

Kevin Kim, DVP of Investor Relations

Thank you, David. Angie, let's dive right into Q&A, please.

Operator, Operator

Absolutely. Your first question comes from the line of Nik Modi with RBC Capital Markets.

Nik Modi, Analyst

Yes. Good morning, everyone. I have a couple of questions. First is just David, just thinking about category growth rates. And I know obviously you're not giving guidance, but how are you just thinking about philosophically? What were category growth rates obviously prior to the whole situation? And how do you think that's going to roll going forward? It's pretty clear, and I think that it's pretty surprising how well the business has held up, taking credit for much more defensive portfolio. A lot of consumer products companies in the staple space are probably going to see elevated levels of consumption as we move forward, even past the pandemic. I'm trying to get your perspective around that particular dynamic. And then just a second, a quick question on the HHI side; did you lose share? I know the leading competitor also had issues with production. I just wanted to understand what happened from a competitive standpoint around added stocks.

David Maura, Chairman and CEO

Let's address these quickly. Thank you for your question, Nik. It's great to hear from you, and I'm pleased to know you're doing well. Regarding HHI, frankly, in our plumbing section with Price Pfister, we are maintaining stability, and we're actually bringing in some new business, so I expect continued growth. We have certainly gained market share in our hardware segment, and we believe we are on the right track there. In terms of security, our largest unit, supply disruptions and challenges in acquiring new products due to mandatory closures in certain regions did have an impact. However, I believe we are managing to hold our own. In about 90 days, I hope to be able to discuss additional market share gains. We are actively implementing global productivity improvement programs. I want to emphasize that the employees of this company are stepping up to the challenge. We are transforming our culture, and our team understands that we are not just manufacturing goods for the home and yard but also improving people's lives in significant ways. Many people are facing tough times, and this reinforces our purpose. Our global calls have encouraged our team to recognize that we’re not only offering good services; we’re making life easier for customers, whether it’s enjoying their pets, maintaining their yards, or securing their homes. There's a renewed energy within the company, and we are motivated by a larger purpose. With our investments in global productivity improvement, innovation, new products, and marketing efforts, we are positioning our business for growth. We are maintaining our position and gaining share in most areas. During the supply constraints, we focused on our top brands, which has helped us significantly this quarter. We are emphasizing our major brands, including Spectracide, Cutter, Repel, Kwikset, DreamBone, and SmartBone. Additionally, Russell Hobbs is performing exceptionally well in the U.K. Our goal is to strengthen our brand equities and drive growth. We're making headway. Regarding growth rates, while I won't specify exact figures, we were around 2% to 3% in category growth, and now we are observing elevated levels, which suggests a sustainable tailwind moving forward.

Nik Modi, Analyst

Great. Thanks, I'll pass it on.

Operator, Operator

Your next question comes from the line of Faiza Alwy with Deutsche Bank.

Faiza Alwy, Analyst

Yes, hi, good morning, everyone.

David Maura, Chairman and CEO

Good morning, Faiza.

Faiza Alwy, Analyst

My first question is around the economic environment. I'm wondering how cyclical the HHI business might be and how dependent you think it is on the macro environment given the current economic uncertainty.

David Maura, Chairman and CEO

With a 33% decline in GDP, there's a lot of uncertain economic activity, but we expect HHI to grow in this current quarter. Seventy-five percent of our business is from replacement in your repair model type business, and we have the largest install base in the United States. We continue to lead in market share. Looking back six to nine months, this company faced the challenge of offsetting $70 million in tariffs as a baseline. In the second quarter, we achieved a sales growth of 4%. Last quarter, we saw EBIT growth of over 20% in the second quarter, which refers to the March quarter, and we were unprepared for the COVID-19 impact. I commend the team for their efforts; everyone has been working diligently. I believe we are navigating the economic uncertainty created by COVID-19 effectively. I want to acknowledge all our frontline workers in our factories and distribution centers worldwide for their exceptional work. I am confident in stating that I expect HHI to grow in Q4, as we have restored our supply chain, and demand remains strong.

Jeremy Smeltser, CFO

And I think David too, I'd also add. There are some different things happening as it relates to housing trends and just the economic number that you're seeing, right? There is very low inventory around the country. Home delivery is in demand. A lot of people are trying to flee multi-family units to get to their own homes. Right now, that's looking like good health and start indicators which is beneficial for the 25% of our HHI business that's exposed to that new home starts.

Faiza Alwy, Analyst

Okay, that's really helpful. Just I guess my second question is you only have two months left in the year. It seems like you have a lot of catch-up to do in terms of inventory and open orders in HHI. So I'm curious about your thought process with regard to there you're not providing specific guidance for the last remaining quarter, even if it's a wide range. Where do you see the most level of uncertainty just over the next couple of months?

Jeremy Smeltser, CFO

Yes, I think it's a fair question. The way I think about it is obviously in many states here in the U.S. and also in some of the countries we operate in, there are still a lot of new cases rising and there's a potential for additional shutdowns. While that's not impacting POS for us at this point because they remain strong, the reality is our ability to fill those orders could still be temporarily impacted if further closures were to hit us. We just want to be cautious as it relates to providing that financial guidance, but we're giving you the trend through July.

Faiza Alwy, Analyst

Okay, thank you.

Jeremy Smeltser, CFO

Thank you.

Operator, Operator

Your next question comes from the line of Bob Labick with CJS Securities.

Bob Labick, Analyst

Good morning, congratulations on a strong operating performance.

David Maura, Chairman and CEO

Thanks, Bob.

Jeremy Smeltser, CFO

Thanks, Bob.

Bob Labick, Analyst

Overall, I think the margin expansion was really impressive. You talked a little bit about it in particular in Pet and HPC. Could you talk a little more about the drivers for margin expansion and if those record levels are sustainable or how we should think about margins in those categories going forward?

Randy Lewis, COO

So Bob, this is Randy. I'll let Jeremy jump in with some more specifics regarding Pet. We’ve been discussing with you guys for about four quarters now about where they were in the turnaround cycle, and we're starting to see the results from the initiatives we put in place a couple of years ago as we started globalizing that business. We've done a lot to simplify and focus on the core. We've streamlined supply chains, exited and closed excess capacities with lots of work there. While I'm not saying the record level is sustainable, we do see a long way ahead of us in that business. The fact that all of them are benefiting very well from our initiatives in our Pet program is a positive sign. HPC is a very similar situation. There was a couple million dollars this quarter related to a tariff catch-up that will flow through. For the most part again, we're about 18 months into a new management team, with a new global strategy and operating model. That's about the amount of time it typically takes to create new products and implement meaningful supply chain changes, so we're excited about what's going to happen in terms of margin expansion in both of these specific categories.

Jeremy Smeltser, CFO

Yes, I think Bob, I just add that over time, we do think there's margin opportunity. The GPIP program has been beneficial; thus far, a lot of the savings have gone to offset the $70 million or so in tariffs this year and $50 million last year that David had talked about. But we see opportunity as we move forward. As David mentioned, we're also planning on investing 100 basis points worth of margin or 50 basis points of margin incremental in A&P, which we expect to drive organic growth in the future. This again should positively impact the bottom line.

Bob Labick, Analyst

Got it, that's great. And that kind of leads right into my next question, which really is about how you are positioning the businesses to drive incremental sales and continue to gain share, especially for HPC beyond the initial stay-at-home pop that you might have gotten. What’s the opportunity set in front of you, and how do you view this incremental advertising to continue driving recurring purchases?

David Maura, Chairman and CEO

At the end of the day, we have tremendous products, and our innovation pipeline is strong. We have a lot of new products coming out. Historically, the company prioritized a merger and acquisition strategy, but recently we have shifted to focus on organic growth and are really investing in the business. Currently, we believe we have a remarkable opportunity. We just launched Cutter hand sanitizer, a product we never had before. We aim to support our employees, frontline workers, and people in hospitals across the country, as well as our customers through our e-commerce offering. It's a great time to promote this product and inform people not only about our hand sanitizer but also about Cutter’s effectiveness in protecting against mosquitoes and other pests. We want to increase our market share. We are applying the same strategy with the Spectracide campaign, ICT THY POWER, and with Kwikset, which features SmartKey technology allowing you to change your key in 30 seconds or less. Our goal is to communicate the message and help people understand how our products can improve their lives. I believe Spectrum has a fantastic opportunity to relay this message, gain market share, and generate more business through innovative products that create recurring revenue streams.

Bob Labick, Analyst

Great. Congratulations on the quarter. It's really nice to see all the hard work playing out in the operational performance.

Operator, Operator

Your next question comes from the line of Ian Zaffino with Oppenheimer.

Ian Zaffino, Analyst

Hi. Thank you very much. Guys, good to see how well the e-commerce business is growing. Can you give us a little bit more color there? Which divisions are doing best in terms of online sales, and how is their share doing online? I'm also curious about whether it is more in specialty versus general e-commerce channels?

David Maura, Chairman and CEO

I'm going to let Randy address it. We are seeing tremendous growth in e-com, and we're seeing acceleration; Randy, you want to take a stab?

Randy Lewis, COO

Yes. So what I can share is that in the quarter, the business units that performed the strongest in year-on-year growth in e-commerce were our appliance business and our Home & Garden business. That move in the appliance business is quite encouraging to us because a year and a half ago, it was an area where we felt we were losing ground. We put a very specific focus with a brand new team over the last 12 months, and that focus is really starting to pay dividends. We’ve centralized our e-commerce operations across all four businesses to share best practices. So, those two businesses did the best. Pet, again, very strong. HHI, was a little slow this particular quarter just mainly because of supply constraints. One last piece of information is that North America grew at a little faster pace than Europe, although Europe was still strong.

Operator, Operator

Your next question comes from the line of Olivia Tong with Bank of America.

Olivia Tong, Analyst

Hi. Thanks. Good morning. Hope everyone is well.

David Maura, Chairman and CEO

Hi, Olivia.

Olivia Tong, Analyst

My first question for me is just unpacking the lost COVID-related sales and profit, the $100 million in sales and $30 million in profit a little bit, because obviously those are pretty big numbers, and the margin implications are quite high. How much of that do you think you can get back, particularly on the HHI side? It sounds like you feel pretty good about the next couple of quarters. But then for Home & Garden, obviously, there's some supply chain issue there. Are those sales now lost because of a seasonal category, or is there catch-up potential in that category as well?

Randy Lewis, COO

So good morning, Olivia. I would say it's a mixed bag depending upon the different businesses. In Home & Garden, there's obviously seasonality. We're running toward the tail end of the season. We continue to see strong demand there. We are running all out in the supply chain and we're headed into August, which is a very unusual thing for us. So inventories are relatively low, and I'm sure we've missed some consumer takeaway over the season. But the main thing for us is ensuring that we are doing the right things for the health of the business. We're excited about the set-up for next year. Line reviews are going well, relationships with retailers are strong, our investment is growing, and we have a strong portfolio of top brands. In HHI, which had the biggest impact in the quarter, we had a growth in our backlog of almost $40 million over the quarter. That delta can be picked up. We also think that as the supply chain continues to replenish, there's a fair amount of retailer inventory that will catch up as well. We want to caution that we probably won’t be fully caught up until early Q1.

Olivia Tong, Analyst

Got it. That's helpful. Two related questions: first, you guys talked about how you sold off some of your Energizer shares. Can you talk about your future plans for what's remaining of that slug? And secondly, you have a strong quarter and good outlook. But it sounds like on share repurchase, it’s still taking a backseat. You were aggressive pre-pandemic, so can you talk about what you need to see to get comfortable reinstituting the buyback? Will it be waiting until you get to the midpoint of your leverage range at the end of the year or below that? Just walk us through that, it would be great. Thank you.

David Maura, Chairman and CEO

Yes, I mean on the Energizer stake, it's just opportunistic. March and April were periods of significant financial stress in the markets, and in conjunction with getting a new cash flow revolver and terming out some debt; it's leverage-neutral, which gives us good runway. I think it was a good liability management move. Looking forward, we were aggressive on the repurchases earlier this year. This was the year we were going to deliver well, in my opinion, but we didn’t foresee COVID-19 in the plan. We backed off repurchasing shares to maximize liquidity and protect the balance sheet. Our stock remains significantly undervalued relative to our peers, and we would like to return to repurchasing. I personally would like to see EBITDA start to grow and the leverage ratio tip down. We believe we are very attractive from a valuation standpoint, both on a total enterprise value to EBITDA basis and on a free cash flow yield basis. I think if people do the math, they can see we are a strong free cash flow yield company with an improving outlook.

Olivia Tong, Analyst

Thanks guys. Be well.

David Maura, Chairman and CEO

You too, Olivia. Thank you.

Operator, Operator

Your final question comes from the line of Jim Chartier with Monness, Crespi, Hardt.

Jim Chartier, Analyst

Hi. Thanks for taking my question.

David Maura, Chairman and CEO

Sure. Good morning.

Jim Chartier, Analyst

You guys have been increasing your marketing spend for a couple of years now and then another $20 million step up here. I guess how does your marketing spend following the step-up compare to your peers? How much more opportunity do you see to increase the marketing investment going forward?

Randy Lewis, COO

Yes. So, Jim, this is Randy. I'd tell you our marketing spend has been relatively flat and low compared to peer sets until this year. We've planned incremental spending this year, and David's $20 million incremental is above that. That's beyond just the balance of this fiscal year. But without getting into exact data, we still have a ways to go. We believe we're still well on the positive side of the ROI curve there. We feel that the key to strategic growth, organic growth is insights, innovation against those insights, and advertising against those innovations. So that's the recipe across the entirety of the enterprise, and we're just now getting started.

David Maura, Chairman and CEO

To give a little bit of specifics, Jim, historically, we've been just under 1% of sales on marketing spend. The incremental $20 million that David talked about—we will spend around about half of that this fiscal year, and around half of it in the first half of next fiscal year. We do expect this year's spend to exceed the 1% of sales mark. I'd say as you look at peer groups, the categories vary significantly. But we believe there is some runway for continued increased spending as we go forward, and we intend to show success and return on that investment.

Jim Chartier, Analyst

Great. Thank you.

Randy Lewis, COO

We’re not at the point where I think those costs get passed on to customers at this time. They've been relatively controlled. HHI has had a fair amount due to shutdowns, but we've been able to find offsetting efficiencies and productivity. Those factors will not materially impact us as we move forward into next year.

Jeremy Smeltser, CFO

That's right. A lot of companies, our travel and T&E costs are down significantly compared to COVID-19. That’s another consideration as you think about a more normalized environment for next fiscal year.

Operator, Operator

I would now like to turn the conference back to David Maura for any additional or closing remarks.

David Maura, Chairman and CEO

Listen, again, just thanks everybody for joining us. We believe we're on the right trajectory. I really want to thank all of our employees around the globe for their hard work. As we’ve reached the top of the hour, we will conclude the conference call. Thanks for your interest in Spectrum Brands; we look forward to talking to you again in the next 90 days. Stay well, stay safe, and we'll talk to you soon. Thanks.

Operator, Operator

Thank you for participating in today’s conference call. You may now disconnect your lines at this time.