Earnings Call Transcript - SPB Q2 2021

Kevin Kim, Divisional VP of Investor Relations

Good day and thank you for standing by. Welcome to the Q2 2021 Spectrum Brands Holding, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. I would now like to hand the conference over to your speaker for today, Kevin Kim. Please go ahead. Great. Thank you, Francis. Welcome to Spectrum Brands Holdings Q2 2021 earnings conference call and webcast. I'm Kevin Kim, Divisional VP 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 Investor Relations 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, our 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 May 7, 2021 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 statements. Also, please note, we will discuss certain non-GAAP financial measures on 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 Maura.

David Maura, Chairman and CEO

Thank you, Kevin. Good morning, everyone. I appreciate you joining us for the call today. Before I begin, I would like to address our employees and partners worldwide. Although our work is ongoing, our financial results indicate another quarter of strong growth, both at the top and bottom lines, confirming our commitment to structure for growth and efficiency to better serve our consumers, customers, and stakeholders. I am also proud of the progress we have made over the past three years. Our teams have fully embraced our new global operating model and the spirit of our servant leadership culture. They have persevered through a global pandemic to deliver consistent financial performance for our stakeholders. Thanks to our employees, Spectrum Brands has emerged as a more efficient and focused operating company. We will remain guided by our values of trust, accountability, and collaboration as we strive to improve living conditions at home. Thank you all; I truly appreciate it. Now, let’s turn to Slide 6. Our latest financial results for the second quarter show significant top line growth and operating leverage. We increased our investments in marketing and advertising for our trusted brands across all business units, which helped drive strong demand this quarter. Our revenue grew by 22.6% in the second quarter, with double-digit growth across all business units. Furthermore, our e-commerce sales surged nearly 43%. Looking at the bottom line, our adjusted EBITDA for the second quarter rose by 28.8%, fueled by increased volumes and improved efficiencies from our Global Productivity Improvement Program. We also saw improved operating leverage despite higher inflation and increased marketing and advertising investments. As we discussed in previous earnings calls, our reinvestments are reigniting the cycle of new product launches, enhancing our top line growth, expanding margins, and generating greater profitability and cash flow. Now let's move to Slide 7. As noted previously, transportation and commodity-related inflation continue to pose challenges for our industry. We expect these pressures to significantly impact the second half of the year. Jeremy and Randy will provide more details in their remarks. Nonetheless, our outstanding first half performance and ongoing organic growth provide us the confidence to raise our earnings outlook to reflect mid-teens growth in net sales and adjusted EBITDA, along with projected free cash flow between $260 million and $280 million. We are well prepared for the third quarter. While we acknowledge the tough year-over-year comparisons as we evaluate last year's fourth quarter performance, we will keep our focus on executing our strategies, leveraging our stable manufacturing and distribution capabilities, and investing in our strong brands. We are committed to capturing gross GPIP savings and our teams are actively targeting additional savings for 2022, which Randy will discuss further. Our new operating model and strategic investments over the past few years have created a stronger and more resilient company, and we anticipate long-term growth. Now let’s discuss Slide 8. This quarter, our balance sheet improved, ending with net leverage of 3.2x and maintaining over $860 million in total liquidity. The actions we took earlier this quarter to refinance our debt are expected to decrease our annual interest expense by $18 million. We issued $900 million in total debt, including a mix of Term Loan B and new 10-year senior notes at a rate of 3 and 7/8, which will lower our cost of capital. We are very excited about the acquisition of Rejuvenate, which we announced in April. Rejuvenate, known for its household cleaning and maintenance products, boasts a loyal following. We expect this transaction to close in the third quarter, aligning perfectly with our strategy to enhance home living and adding a new category to our Home & Garden business unit. I want to extend a warm welcome to the Rejuvenate team as they become part of Spectrum Brands, and I am confident we will create significant value together. Moving to Slide 9, our capital allocation priorities will focus on: First, investing internally in our highest-return opportunities, including building our brands through consumer insights, R&D, innovation, and marketing to drive profitable organic growth. Second, returning cash to shareholders through dividends and share repurchases. Third, pursuing disciplined mergers and acquisitions focused on strategic acquisitions that create value. We aim to maintain a net leverage ratio in the range of 3 to 4 times. Jeremy will now provide more details on the financials, followed by Randy who will offer additional insights on the business. Over to you, Jeremy.

Jeremy Smeltser, CFO

Thanks, David. Good morning everyone. Turning to slide 11 and a review of Q2 results from continuing operations. I'll begin with net sales. Net sales increased 22.6%. Excluding the impact of $18 million of favorable foreign exchange and acquisition sales of $26.8 million, organic net sales increased 18% with double-digit growth across all four business units. Gross profit increased $75.1 million and gross margin of 35.1% was in line with the year ago, driven by higher volumes in all business units, improved efficiencies from our Global Productivity Improvement Program and favorable mix offset by higher freight and input cost inflation and last year's retrospective tariff excluding benefits. SG&A expense of $262.2 million increased 13.1% at 22.8% of net sales with the dollar increase driven by the improved volumes, higher advertising and marketing investments and incentive and distribution costs. Operating income of $116.8 million was driven by improved volumes, improved productivity and lower restructuring costs, partially offset by input cost inflation, marketing and advertising investments and incentive costs. Net income and diluted earnings per share were primarily driven by the operating income growth and favorability from Energizer investments, offset by higher debt refinance costs. Adjusted diluted EPS improved to $1.76 driven by operating income growth along with lower shares outstanding. Adjusted EBITDA increased 28.8% from the prior year, primarily driven by growth across all business units. Turning to slide 12. Q2 interest expense from continuing operations of $65.5 million increased $30 million due to the debt refinancing costs. Cash taxes during the quarter of $11.9 million were $4.4 million lower than last year. Depreciation and amortization from continuing operations of $38.7 million was $2.3 million higher than the prior year. Separately, share-and incentive-based compensation decreased from $14.6 million last year to $8.5 million this year driven by the change to incentive compensation payout methodology we talked about last year. Cash payments for transactions were $3.1 million down from $6 million last year. And restructuring and related payments were $7.6 million versus $12.8 million last year. Moving to the balance sheet. The company had a cash balance of $290 million and approximately $577 million available on its $600 million cash flow revolver. At the end of the quarter, total debt outstanding was approximately $2.6 billion consisting of approximately $2.1 billion of senior unsecured notes, $400 million of term loans and approximately $159 million of finance leases and other obligations. Additionally, net leverage improved sequentially and was approximately 3.2 times. During the quarter, we sold off our remaining Energizer shares for proceeds of $12.6 million. Capital expenditures were $16.2 million in Q2 versus $13 million last year. Turning to slide 13 and our updated earnings framework for 2021. We now expect mid-teens reported net sales growth in 2021 with foreign exchange expected to have a positive impact based on current rates. Adjusted EBITDA is also expected to grow mid-teens. This includes benefits from higher volumes, our GPIP program, approximately 11 months of results from the recent Armitage transaction in Global Pet Care offset by net tariff headwind of about $30 million to $35 million, driven by the expiration of previously disclosed retrospective tariff exclusions in 2020. In addition, as David mentioned, we have also now factored in $120 million to $130 million of input cost inflation compared to a year ago. Fiscal 2021 adjusted free cash flow for continuing operations is now expected to be between $260 million and $280 million, up from the previous range of $250 million to $270 million. This includes plans for incremental investments and inventory levels, as well as the expected input cost inflation. Depreciation and amortization is expected to be between $180 million and $190 million including stock-based compensation of approximately $30 million to $35 million. Full year interest expense is now expected to be between $130 million and $135 million. This meaningful step-down compared to our prior range of last year is driven by our successful $900 million refinancing in February of our senior notes due 2024 and partial refinancing of our senior notes due 2025. On a full run rate basis as David mentioned, we expect annualized savings of approximately $18 million. Restructuring and transaction related cash spending is now expected to be between $70 million and $80 million. Capital expenditures are expected to be between $85 million and $95 million. And cash taxes are expected to be between $35 million and $40 million and we do not anticipate being a significant U.S. federal cash taxpayer during fiscal 2021 as we continue to use net operating loss carryforwards. We ended fiscal 2020 with approximately $800 million of usable federal NOLs. For adjusted EPS, we use a tax rate of 25% including state taxes. Regarding our capital allocation strategy, we continue to target a net leverage range of three times to four times adjusted EBITDA. As it relates to our 2021 earnings framework, please keep in mind just a few factors. First, we continue to plan for incremental advertising investments of over $20 million in fiscal 2021 as we continue to raise awareness, consideration and purchase intent with consumers. Second, recall the Q4 results this fiscal year will have six fewer selling days compared to the prior year. It's important to recognize this modeling nuance. Third, we continue to manage through inflationary pressures, which are currently expected to be $120 million to $130 million higher than the prior year. And fourth, adjusted EBITDA is also expected to be negatively impacted by the absence of Energizer dividend income. Now to Randy for a more detailed look at our operations.

Randy Lewis, COO

Thanks Jeremy, and thank you all for joining us this morning. My comments today will focus on reviewing each business unit to provide detail on the underlying performance drivers of our operating results. And I will also update you on the current overall cost environment, progress on our GPIP program and results from our commercial operations team in e-commerce and marketing. Overall, we continue to see significant benefits from our operating model transformation, as well as the addition of new talent in many key strategic roles. Q2 reflected another quarter of exceptional financial results with strong improvements across all four businesses. With the backdrop of elevated demands, this quarter reflected generally improved supply chain performance and consistent service levels despite continued industry challenges. These efforts in addition to our continued commercial investments helped drive another quarter of double-digit sales and adjusted EBITDA growth. Diving into the specifics of each business. Starting with Hardware & Home Improvement on slide 15. Second quarter reported net sales increased 18.4% and organic net sales increased 17.4%. Adjusted EBITDA increased 5.6%, primarily driven by positive volumes and productivity improvements that were materially offset by last year's significant benefit from retrospective tariff exclusions, as well as higher freight and input cost inflation, distribution costs, COVID-19-related costs and higher marketing investments. Excluding last year's tariff exclusions, adjusted EBITDA improved 20.1%. This represents another quarter of strong double-digit growth within HHI. While inventory levels are improved and have normalized over the last few quarters, demand continues to outpace supply with continued strong consumer demand for our products. This bodes well for our third quarter, especially as we are lapping last year's government-mandated shutdowns in three of our manufacturing facilities throughout Mexico and the Philippines. We expect continued demand increases throughout the balance of 2021, driven by our new product introductions and incremental advertising investments. Fundamentals across both, the repair and remodel segment, as well as the new build channels continue to be strong. In our Kwikset business, we are focused on driving demand for microbond which incorporates antimicrobial technology on the surface of our hardware; also Smartkey technology, which allows users to rekey their own locks to any Kwikset key in about 15 seconds; and finally our exciting Halo Touch smart lock product, which includes biometric- and WiFi-enabled technology along with voice assist capability through Alexa and Google Assistant. As an example, the Kwikset team recently partnered with long-standing customer Shea Homes to begin installing Halo Touch locks on every new build as a standard home feature. This and other similar wins with Halo platform are encouraging as we believe home automation trends will continue to drive sales for our electronics, smart connected locks. Additionally, our Baldwin brand, which is a leader in luxury security products, launched a new quick-ship program this quarter with a wide array of SKUs shipping within five business days dramatically improve the customer experience. Finally, I'm also pleased to announce that Tim Goff accepted the role of President of HHI in March. Tim is one of our top strategic leaders and most recently served as the Head of our Commercial Operations Group. He captained the transformational benefits that that team has had on the new SPB operating model and business results. Tim knows the HHI business very well, having previously served as the Chief Marketing Officer and holding other supply chain operational and sales leadership roles over the years. We look forward to sharing more details over the coming quarters as Tim and the HHI team put to build on our leading market positions in Spectrum Brands' largest business unit. Now to Home & Personal Care which is slide 16. Reported and organic net sales increased 28.0% and 24.3% respectively. Adjusted EBITDA more than doubled to $25.4 million. Net sales were driven by continued strength in small kitchen appliances and personal care categories, as well as growth across all regions. E-commerce sales both at pure-play and retailer.com channels continued to grow at a high rate. EBITDA was driven by higher volumes and productivity improvements, partially offset by increased freight and input cost inflation and continued marketing investments. Q2 represented the seventh consecutive quarter of year-over-year top line growth, as momentum for our home appliances and personal care products continued well past the successful holiday season. We've seen incremental demand in the U.S. for recent stimulus spending and our fill rates continue to improve. This bodes well for our plans to continue to grow sharing and shelf space with our key retailers. However, when modeling this business, please keep in mind inflationary headwinds within Home & Personal Care. We expect our pricing and supplier partner initiatives will only partially offset the second half headwind. As a result of these factors, we currently expect margin pressure in the second half and we'll continue working to mitigate the inflation throughout the year and into fiscal 2022. Our focus on 2021 and beyond will remain on consumer-led, insights-driven new products. We will continue to drive those investments in our brands across more markets than ever before. Moving to Global Pet Care which is slide 17. Q2 represented another strong quarter of financial performance with reported net and organic sales growth of 23.9% and 10% respectively. Adjusted EBITDA grew 39%. Top line growth was driven by both our aquatics and companion animal categories, with broad-based demand across subcategories and channel partners. Higher EBITDA was driven by volume growth and productivity improvements, partially offset by higher inflation and distribution expenses, as well as advertising and marketing investments. Q2 was also the tenth consecutive quarter of year-over-year top line growth and eighth consecutive quarter of bottom line growth, as our existing legacy brands and recently acquired brands all performed well in their categories. Our global pet team continues to build its worldwide market leadership position in the core categories of aquatics, dog chews, pet rooming and pet stain and odor. You'll recall that we added Omega Sea as an acquisition last year to advance our premium aquatics offerings and our addition of the Armitage Pet Care came earlier this year. This is an excellent platform for international expansion, not only our dog chews business but also cat chews, treats and toys. As we've said before, our global pet care team remains confident that 2021 and beyond will benefit from the continued execution of our global strategies, coupled with the very strong category growth fundamentals. In particular, we anticipate sustained demand for our high-margin consumables, given all of the new pet parents in companion animal and all the new hobbyists who have recently entered the aquatics and reptile categories. These are long-term commitments and bode well for the future demand of our products. And finally, Home and Garden, which is slide 18. Second quarter reported net sales increased 21.4% and adjusted EBITDA increased 22.7%. Top line again grew across controls, household insecticides and repellents, with strong early season orders across all channels. EBITDA increase was driven by volume growth, favorable mix, productivity improvements, partially offset by advertisement and marketing investments and higher distribution expenses. We believe both Spectrum Brands and our key retailers are very well positioned as we enter Q3, which is historically our largest quarter for sales and profitability. Q2 reflected another quarter of improved production capabilities to meet continued high levels of demand, which results in heavier inventory positions at retail compared to prior year. Spring is just starting in much of the U.S. which kicks off our selling season for controls and repellants. We are seeing good early quarter POS performance. The weather and thus, the resulting POS performance in our peak season remains an unknown variable. We are very well positioned to maximize our results this year, despite ongoing challenges from input and freight markets. We're also very excited about the anticipated acquisition of Rejuvenate, a leading household cleaning maintenance and restoration product company. Rejuvenate has a loyal customer following and has generated impressive top and bottom-line growth. Product categories centered around floor care, as well as disinfectants and kitchen and bath. Last year's net sales were over $60 million with growing sales and margins over the past three years. We are confident in our ability to capture operational and revenue synergies, of a business that has strong EBITDA margins and customer alignment with our existing channels. The transaction is planned to close during the third quarter, but we look forward to applying our strengths in manufacturing, marketing and sales to further strengthen the Rejuvenate brand, particularly within underpenetrated retailers. Our continued A&P investments this quarter are consistent with our strategy to invest more resources to tell our story around brands such as Spectracide, Cutter, Hot Shot, and EcoLogic along with incremental research dollars to deliver even more new and innovative products. We believe these actions will further enhance our mission to be a recognized market leader in providing consumers the best solutions to conquer nature's challenges and enjoy life. This is possible with our distinctive combination of brands formulations, registrations supported by efficient manufacturing and strong customer relationships. The fundamentals in this business remain very strong. With solid profitability and high barriers to entry, we're confident that our strong brand equities and increased investments in product development and marketing will accelerate long-term growth rates. Now let's turn to our internal growth and efficiency efforts with our Global Productivity Improvement Program which is on slide 19. As David mentioned, we remain laser-focused on the execution of our key initiatives in this program, as Q2 delivered productivity enhancements across all business units. We remain resolute on using the savings to reinvest back into the business to deliver long-term sustainable organic growth. This program continues to be our most important strategic initiative, as we transform to our new global operating model. Our F 2021 savings are running ahead of previous projections. And we are now raising our total gross savings target of $150 million to at least $200 million by the end of fiscal 2022. Our confidence in raising this target is driven by strong performance from our teams and an expanded scope of our existing program initiatives. As Dave and Jeremy noted earlier, inflationary headwinds while second half weighted did begin to impact our business in this quarter. During our call last quarter, we indicated these headwinds were $70 million to $80 million higher than we had originally planned for the year, or in other words, $100 million to $110 million higher than fiscal 2020 levels. Based on current rates as well as our improved expectations for top line growth for the year, these inflationary headwinds are now expected to be $120 million to $130 million higher than fiscal 2020 levels. During the quarter, we actively addressed these headwinds with a coordinated and consistent strategy, utilizing many of the tools developed through our GPIP program. We are working in concert with our supplier partners to offset this inflation, and have additional mitigation actions in many areas, such as ocean freight and supplier management. The agreed-upon price increases with our retail partners are going into effect now during Q3 and are expected to continue to step up during Q4. And additionally, we anticipate further pricing discussions being necessary in the back half of the calendar year. We believe at this point that some of these inflationary pressures are likely temporary in nature and may begin to moderate in fiscal 2022. As Jeremy alluded to earlier, these headwinds are currently included in our earnings framework for the year and we will remain vigilant with our operating discipline to maximize the long-term performance of our brands, as a result of this. And finally, our commercial operations team continues to drive impressive results. This quarter e-commerce grew by nearly 43% and represented more than 16% of our total net sales. Additionally, our digital teams continue to leverage data for the early identification of consumer trends to seed new product and sales opportunities and create promotional content and appeals to those consumers. In my section, I want to acknowledge another sensational quarter of progress on our operating culture and our strategic initiatives and I thank our more than 12,000 employees for all they are doing to make us a better, faster and stronger Spectrum Brands. Now back to David.

David Maura, Chairman and CEO

Thank you, Randy. Thanks, Jeremy. Thanks, everybody for joining us today. Earlier this year at CAGNY, at the investor conference, we shared our Spectrum Brands mission, which is we make living better at home. And as I shared earlier, we are more efficient, focused, productive and consistent operating company. Given that we've covered a lot on the call let's conclude with a few takeaways on Slide 21. First of all, our second quarter financials reflect another excellent quarter of top line growth. Investments in marketing and advertising for our trusted brands were higher in each division, which helped drive double-digit top line growth across all of our business units. Second, our second quarter financials reflect another quarter of operating leverage with adjusted EBITDA increasing 28.8% from the prior year with growth across all businesses. Thirdly, our balance sheet improved sequentially, ending the quarter with net leverage of 3.2 times with over $860 million in total liquidity. Additionally, our successful debt refinancing actions this quarter are expected to drive a material step-down in our interest expense. I again want to thank all of our employee partners from our frontline workers in the factories to the distribution centers to the many other teams around the world that have been working from home. I'm extremely grateful for all the sacrifices you have made to navigate our company successfully through these challenging times. Thank you again for your time and for your continued support. Now I'll turn the call back over to Kevin for any questions that we have on the line.

Kevin Kim, Divisional VP of Investor Relations

All right. Thank you David. Francis let's just dive right into Q&A.

Nik Modi, Analyst

Thanks. Good morning, everyone.

David Maura, Chairman and CEO

Hey.

Nik Modi, Analyst

Hey, how are you doing? Just a couple of quick questions. Just on the GPIP program with the increase, can you just provide us any detail on kind of how the flow-through will be for the rest of this year but also next year just so we can understand, how to think about the modeling from that standpoint? And then is Rejuvenate in your guidance? I was unclear, if you guys have included that in your actual framework?

David Maura, Chairman and CEO

Yes. Go ahead Jeremy.

Jeremy Smeltser, CFO

Yeah. So Nik, given the – we don't have pinpoint certainly on timing of closing on Rejuvenate, so we did not include it in the current earnings framework. And on the first question, I'll start. Maybe Randy will have some more color. I think we talked about as we started the year an incremental $60 million in savings from GPIP, most of which we expected this fiscal year on top of the $90 million that we'd already had as we started the year. As Randy mentioned, we're a little bit ahead of that. So I think we'll be a little bit more than that $60 million this year with the rest of the increase flowing into next year. Again, we talked about a little bit better savings on existing initiatives and adding some additional scope, Randy, if there's any color you want to add.

Randy Lewis, COO

I think that covers it well. Nik, a little heavier maybe this year than next. But I think Jeremy covered it.

Jeremy Smeltser, CFO

Yeah. Obviously that's excluding – that's growth. So that's excluding the inflation that we're experiencing.

Nik Modi, Analyst

Okay. And then just one question Randy or maybe David can answer this as well. The housing market obviously has been on a tear, but it looks like inflation in terms of home prices has gotten pretty high. And there's some concerns over affordability. I'm just curious kind of the Spectrum Brands take on that end market?

David Maura, Chairman and CEO

Look my view on that and I've been talking to a few economists during this week as we prepared for this public earnings call is, we continue to see strength in the housing sector. And quite frankly, I think the new administration's policies are going to move cash flows quite frankly to the customer base that we have in Spectrum Brands kind of across the board. Yeah, clearly housing has had a good run. But I think that – I think what – there's a couple of components here. I think during COVID-19 people have expected, hey, there's a lot of pull-forward in a business like ours. I would say, at this point in time, what we've talked about in prior calls is there's some real stickiness that is going to benefit businesses like Spectrum Brands for a very long time. We've talked about pet adoption. That's a material commitment with a lot of duration buying a house with a yard moving to the suburbs. People generally the first thing they do is change that lock. And so our hardware division is really an R&R. It's a renovation business replacement business, and that's 70%, 75% of our business. And quite frankly, we continue to see a lot of homebuilding activity particularly Sunbelt other places. I've been out personally to some of these sites and they're sold out for a year or two years. But there's a lot of shovels going into the ground. There's a lot of projects going on. And we quite frankly are pretty bullish, because we've strengthened our management team. They were upgrading talent there. We're launching a lot of new products in that hardware division, and so we have a very constructive outlook all in all for HHI over the next 12 months, 24 months.

Nik Modi, Analyst

Excellent. Thanks, guys.

David Maura, Chairman and CEO

Thanks, Nik.

Jeremy Smeltser, CFO

Thanks, Nik.

Chris Carey, Analyst

Hi. Good morning, everyone.

David Maura, Chairman and CEO

Good morning, Chris.

Chris Carey, Analyst

So I wanted to pick up on that line of questioning, but perhaps from a bigger-picture perspective right? So it sounds like you think HHI tailwinds can continue into fiscal 2022, in other words that we're at a new base. I wonder if you could maybe just talk to maybe the broader portfolio and the types of things that you think might be helping you now which won't necessarily help you in fiscal 2022. Stimulus checks for the appliances business comes to mind. Pet seems like it's at a new base. So would you expect to grow off of this new base? You're seeing some strength in areas like aquatics which is not typical. Companion animal makes sense to me, garden that makes sense that you have a new home and you want to take care of your front lawns and everything associated. And, I guess, what I'm getting at is that this year has just been so strong so far. And I think that eyes are going to start looking at the fiscal 2022. And if you just think about the divisions that you think can sustain growth or the specific businesses and those that might reverse and basically whether you think you can still deliver organic sales growth off of what is going to be a pretty atypically strong base this year. So any, sort of, broader portfolio perspective would be very helpful for me.

David Maura, Chairman and CEO

I believe Wall Street has miscalculated our projections for the next two to three years. The impact of stimulus checks is significant, similar to a direct financial injection into the system, especially observable in areas like our appliance unit. The current administration's family and infrastructure plans will redistribute cash to our consumer base. Additionally, as we transition back to in-person work, many will retain flexible schedules and continue to work from home, which will drive demand for home improvements, like aquatic sales, that enhance living spaces and reduce stress. The pandemic has triggered structural changes, and as we navigate the policies of the new administration, the economic data in the coming months may appear unusual due to previous factory shutdowns and a dormant economy. With stimulus checks in circulation and increasing economic activity, we anticipate increased cash flow for our main consumer base. While I'm not an economist or politician, we are confident we are capturing market share and building a more robust company. Our team has worked diligently to position ourselves as a leader, aiming to be number one in R&D, innovation, and marketing. This shift in culture is already yielding positive results and aligns with favorable conditions for sustained growth beyond this year.

Chris Carey, Analyst

Okay. Thanks for that. And then just as a follow-up David you certainly have a long history and track record with doing deals. I wonder if you can just provide a bit more perspective on the Rejuvenate acquisition. Certainly, cleaning had a good year in 2020. And just how you're thinking about delivering growth in this business whether distribution opportunities whether taking incremental market share? And then just connected to that the synergy expectations that you think you can get from this business from a margin standpoint and how that's factored into your decision process to acquire the business? Thanks for that.

David Maura, Chairman and CEO

Yes. I will address it briefly before handing it over to Randy. We have strong expertise in manufacturing liquids, and we like the household cleaning space. We aim to grow bigger. This acquisition involves a relatively small company. You're correct; we can absolutely secure additional retail distribution. I believe we can enhance the product and improve its quality. Additionally, we have many ideas for innovation and new product launches that will help accelerate growth. It fits seamlessly into the Spectrum family, bringing significant synergy. This is primarily a growth opportunity, especially since the competition in this area is quite limited. If we manage it well, it has the potential to be a substantial earnings contributor over the next three, five, or even ten years. Randy, would you like to add anything?

Randy Lewis, COO

Yes. Chris, I mean David hit most of the key points here. But we really like the brand. It allows us to jump into a space that we've coveted for quite a while and do it from a position of strength that fits well within our portfolio and our new objectives as David said to be number one in the areas in which we compete. We've got substantial benefits in our selling capabilities and a lot of underdeveloped channels for this business. We've got a lot of opportunities to meld our existing innovation delivery systems formulations et cetera to continue the innovation that Rejuvenate has demonstrated. And we think there's a fair amount of cost synergies associated on the product side that we can continue to drive forward to keep the topline moving.

Karru Martinson, Analyst

Good morning. When you guys talked about demand outstripping supply, where are the bottlenecks? And what can you do in the near term to alleviate those?

David Maura, Chairman and CEO

Yes, we have ships anchored offshore that we cannot get into port. Some containers are stacked too high on boats, causing them to fall into the ocean. We experienced the Suez issue, impacting eight containers. It's an ongoing challenge. However, we have increased our bill rates and have built a more resilient supply chain, allowing us to continue serving our customers. I believe this situation is temporary. I think we will resolve the bottleneck by early spring of 2022, but every day requires significant effort on the supply chain until then. Our teams, including sourcing and supply chain, are doing an excellent job. Fortunately, it's not an availability issue for us; it's just higher costs right now, which will impact us negatively. We are facing this challenge head-on, but I believe it is temporary, and we will get through it as we enter the early part of next calendar year. Jeremy, Randy, any...

Randy Lewis, COO

Karru, I think one of the things that we want to point out is that we have a lot of businesses that are pretty vertical in the supply chain. And our operations are all running at full output based upon availability of transportation and some limited components. So, it's not an internal issue mainly, as David mentioned. We're working with our providers to get through the global transportation kind of backlog. And we see it getting better each month each week and anticipate it continuing to do so into the fall.

Karru Martinson, Analyst

And then, when you guys talk of taking price here in the third quarter, we've been hearing that inputs are certainly easier to price. They're always all over the headlines, but the freight and the shipping has been harder. Are you getting that full price? And are you seeing the industry follow?

Randy Lewis, COO

Well, it's a very dynamic situation. It varies by channel, by category, by business unit. And so I can't give you a blanket answer, but I would tell you that we are attacking it from a standpoint of both transportation and freight as well as input costs. I think I almost feel that transportation ultimately will work itself out over time. And we're taking some unique pricing approaches there with our partners. And we are having success in that space. So, it's going to continue to be a very important thing for us to manage well for the next several quarters as well as everybody in the space. But, we feel good about how we're approaching it.

Karru Martinson, Analyst

Okay. And just lastly, last year weather-wise garden had almost the perfect season. Is that a bit of a headwind for you guys here in the back half, or it's just the continued strength of that at-home customer going to overwhelm that?

Randy Lewis, COO

So, the overall dynamic of the category, I'm very pleased with. I have been in this particular piece of the business for most of my career in Spectrum Brands, and tell you I've never felt better about our ability to compete. With regards to what the weather impact is going to be on the season, I will tell you about that on the November call, because I've never been able to figure it out how to predict it at this point. So, our strategy is always to go in the best position we can to win the game that ends up being on the field. And I feel like we are poised to do that extremely well.

David Maura, Chairman and CEO

Thanks, Karru.

Faiza Alwy, Analyst

Yes, hi. Good morning.

David Maura, Chairman and CEO

Good morning.

Faiza Alwy, Analyst

Hi. I wanted to ask directly about your earnings framework, as it seems you're anticipating better growth in the second half, particularly regarding revenue. I'm curious if there are specific segments or categories that are contributing to your optimism. I'm especially interested in HPC, as I was quite surprised by those numbers. How are you viewing that specific business?

Jeremy Smeltser, CFO

Yeah. So I'll start. It's Jeremy. I mean, if you look at our first half results, you're essentially growing 20%-ish range and we're implying for the year mid-teens on net sales. So that implies a slowing of the growth rate. It's going to be a little bit different business-by-business given the oddities of fiscal 2020. So if you recall Q3 last year for our HHI business in particular it was very challenging on supply. So they were down 20% plus. In Q4 it was the exact opposite, where they caught up. So it will be a little bit different business-by-business, but we do expect a moderation in the growth rate from the first half rate that we experienced in that earnings framework. As it relates to HPC fair point, obviously, a very good quarter. Frankly higher than we expected as we started the quarter. But POS continue to be good. Like David and Randy both mentioned some benefit from stimulus likely in there as well. And perhaps some benefit frankly from people starting to go back to work or starting to travel again particularly in the Remington areas of groom and shave.

Faiza Alwy, Analyst

Okay, that's very helpful. It makes sense. Your comments about the Rejuvenate brand loyalty have me thinking about your existing brands. I know you’ve mentioned reinvestment, and I’m curious if there are any brand metrics you can share. We’ve seen great sales, but is there anything underlying that, such as loyalty or other brand metrics indicating where you’ve seen the most improvement over the last couple of years?

Randy Lewis, COO

So Faiza, we probably don't want to get into the specific metrics. But I can share that we monitor them very closely. Overall, we're observing positive responses to our reinvestment strategy. We're using this on a monthly basis to continually adjust and redirect our investments. The great news is that all categories and business units are experiencing net positive movement in awareness, consideration, trial, and commitment. It's really an exciting time to be involved in this strategy. I hope that helps.

Bob Labick, Analyst

Good morning. Congratulations on another great quarter.

David Maura, Chairman and CEO

Hi Bob.

Bob Labick, Analyst

I wanted to discuss the mitigation efforts for the significant challenges we're facing. You mentioned pricing briefly. Can you explain what you're doing on the supply side? Additionally, as we look ahead to next year, will the price increases be permanent? Are they more like surcharges, or if raw materials and freight costs stabilize, how will product pricing be affected moving forward?

Randy Lewis, COO

On the topic of mitigation, it's really about exploring various options. This involves collaborating with our suppliers and strategic partners to maximize our resources, including how we can engineer our products for better value and make adjustments that won't affect the consumer's experience. We're also considering alternative relationships and suppliers. The positive aspect is that we have spent the last two and a half years collecting and utilizing data effectively. A significant portion of our savings has come from managing the cost of goods sold, which was supported by thorough data-driven strategies. We had a detailed plan in place and the organizational expertise to execute it, which is crucial for our mitigation efforts. Regarding pricing, we're being open with our retail partners. Our investments and brand momentum have positioned us well in these discussions, allowing us to collaborate for the best outcomes for our partners and product categories. In situations where we see temporary cost increases, we're implementing surcharge programs that will eventually end. For more stable input costs, we're applying more permanent price adjustments. However, we acknowledge that pricing is always a topic for ongoing discussion with our partners.

Jeremy Smeltser, CFO

We are clearly focused on this area. Although we don't have all the details yet since the deal hasn't closed, as David mentioned, this is a core competency for our Home & Garden business. We believe that regardless of whether production shifts from its current location, we will be able to enhance the quality and cost structure of that business.

Ian Zaffino, Analyst

Hi, great. Just one more inflation question, since you guys probably haven't gotten enough of them. On offsetting this, I mean, typically I guess, with tariffs you're usually looking for like a 70% to 75% recovery through pricing and maybe a 25% to 30% offset from a supply chain price release. Is that something similar we should expect as you try to offset inflation in this environment, or would the mix maybe change a little bit?

Jeremy Smeltser, CFO

I believe we won't delve into specific pricing details at this time. As Randy mentioned, maintaining transparency with our retail partners and treating it as a partnership is essential. We need to be mindful of the effects on point of sale and the brand's momentum. As David pointed out, we anticipate that some of these inflationary pressures may be temporary. Therefore, it's crucial for us to be strategic about how we manage the impacts on point of sale and the momentum we've built. Discussing exact percentages or amounts in this context might not be prudent.

Ian Zaffino, Analyst

Okay. Understood. And then maybe asking about the repurchase authorization you guys announced. What kind of cadence should we expect, or is this a signal maybe that there's not as many acquisitions out there, or are they not mutually exclusive? Just a little bit of color on that would be helpful? Thank you.

David Maura, Chairman and CEO

We previously had a $1 billion program and utilized about $600 million of it, which was set to expire. I appreciate having the option to repurchase our stock, so I requested the Board to approve another $1 billion for share buybacks. This is a three-year program. However, I want to emphasize that while our stock is beginning to respond positively to the extensive efforts we are making to create long-term value, I still believe it is undervalued at this moment. Our company is increasingly generating higher levels of free cash flow. Since external acquisitions tend to be expensive, it's beneficial to have the capacity to potentially buy back $300 million worth of stock each year or even more. We will keep you updated once this is complete, but we aim to manage our leverage wisely in this situation. We have a few small acquisitions to finalize and integrate. Looking ahead, I find our current share price very appealing for continued repurchases.

Ian Zaffino, Analyst

All right, great. Thanks for the color. Good quarter.

David Maura, Chairman and CEO

Thank you.

Carla Casella, Analyst

Hi. Following up on your previous remarks about your stock being undervalued, I would also argue that your bonds are undervalued. You were downgraded by S&P during the pandemic. Have you had any discussions with the rating agency? Do you have a target rating, or are you aiming to reach BB or investment grade at some stage?

David Maura, Chairman and CEO

I agree with you about BB. Getting the rating agencies to align is something that will require a few more follow-up calls. However, what we see currently is that on the ratings front, we have two positive developments. We're experiencing a nice growth trend in EBITDA. What we want to communicate is our intention to underpromise and overdeliver. We don’t want to overextend ourselves, but the fact is we are succeeding and anticipate continued success. We have trends and inflation factors to consider in the latter half of the year that we want to be transparent about. We are generating increasingly higher levels of EBITDA, and I expect that trend to continue into 2022 and beyond. This will naturally lower our leverage ratio and improve our interest coverage. Additionally, we have just refinanced, which has significantly reduced our cost of servicing debt. As our interest expenses decrease, our free cash flow is expanding, making us a more compelling free cash flow story as we move into 2020. All these factors create a positive trajectory for our credit profile and, hopefully, will lead the rating agencies to recognize this. Let's see how things develop. Jeremy, do you have any additional insights?

Jeremy Smeltser, CFO

Yes. Obviously, we have ongoing conversations with the agencies Carla and good relationships. I think you're as aware as anybody on the call. If you go back a year ago, the agencies in general we're very, very cautious and conservative in the pandemic. And so I think the recent actions we've had to move from a negative outlook to positive is a good start, but I think they were a little bit entrenched in that cautious approach, having been burned in the past. And so we understand that. I think like David I like operating in a BB world where we execute more at the investment grade type terms and covenants. I think high-yield investors understand us really well. I think we're comfortable operating where we are.

Carla Casella, Analyst

And just one follow-up. I know you took out some of your debt or refinanced this year. You've got one more piece of somewhat high-cost debt in the structure. Any thoughts about either further refinancing, or would you just consider paying down with cash and free cash flow?

David Maura, Chairman and CEO

Yes, we're always monitoring the markets. When something approaches the call premium dropping to par, it's definitely more interesting. It seems that the interest rate outlook will stay low for some time. Currently, our intent is to generate free cash flow and pay down debt. We had no bank debt in our capital structure prior to the recent refinancing. Although we now have some prepayable debt at par, your observation is correct that we still have some high-coupon debt. It's great to look ahead and know that we can consider options to further reduce interest expenses. We'll keep you updated, and we understand your concerns and are paying attention.

Kevin Kim, Divisional VP of Investor Relations

Great. Thank you Francis. With that, we've reached the top of the hour. We'll also conclude our conference call. Thank you to David, Jeremy and Randy. And on behalf of Spectrum Brands, thank you for your participation.

Operator, Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect.