Earnings Call Transcript - SPB Q3 2025

Operator, Operator

Good day and thank you for standing by. Welcome to the Third Quarter 2025 Spectrum Brands Holdings earnings conference call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joanne Chomiak.

Joanne Chomiak, Senior Vice President of Tax and Treasury

Thank you, and welcome to Spectrum Brands Holdings Q3 2025 Earnings Conference Call and Webcast. I'm Joanne Chomiak, Senior Vice President of Tax and Treasury, and I will moderate today's call. To help you follow our comments, we have placed a slide presentation on the Event Calendar page in the Investor Relations section of our website at 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, our Chairman and Chief Executive Officer; and Jeremy Smeltser, our Chief Financial Officer. After 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 August 7, 2025, 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. Our statement reflects our expectations regarding tariffs, which are based upon currently known and effective tariffs and do not reflect tariffs that have been announced and delayed or other additional tariffs, which could result in additional costs. Also, please note that we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website in the Investor Relations section. Now I'll turn the call over to David Maura.

David M. Maura, Chairman and Chief Executive Officer

Thanks, Joanne. Good morning, everyone. Welcome to our third quarter earnings update. I appreciate everyone for joining us today. I'll begin the call with an overview of the global economic markets and how they have affected our company. After that, we'll discuss Spectrum's operational performance and our strategic initiatives. Jeremy will then provide a detailed financial and operational update, including results from each business unit. Let’s go to Slide 6. Last quarter, I referred to the significant disruption caused by tariffs, which has affected nearly every aspect of our operations. The sudden increase in the cost of importing products from China was something we never anticipated. At that time, about 20% of our global cost of goods sold was sourced from China for the U.S. market, and the soaring import costs forced us to take immediate and severe actions to safeguard the company. I mentioned previously that we would remain in control, be adaptable, and protect our interests. We were determined not to sacrifice the long-term viability of our business for short-term benefits. I believed we could navigate through the current volatility and come out as a stronger competitor. We anticipated short-term challenges from these decisions but remained confident that focusing on long-term sustainability would outweigh immediate gains. Now, after 90 days, I feel assured we made the right choices. We faced challenges directly and felt their impact on our results this quarter, but we are beginning to see the advantages of those tough decisions. This meant we encountered significant supply issues in the third quarter. You may remember that U.S. tariff rates on Chinese products jumped to between 145% and 170%. Earlier this year, we halted nearly all finished goods purchases from China until we could ensure profitability once tariff levels decreased. In mid-May, when the tariff rate dropped to 30%, our businesses resumed placing strategic orders, purchasing only where prices were tariff-compliant. Revamping our supply chain took time due to our previous shutdown. We were negotiating supplier pricing, prioritizing production, and coordinating with freight carriers, and I'm proud to say we have an outstanding supply chain team. However, even with their efforts, we went up to eight weeks without any product imports, causing stock shortages of our key SKUs. Regular supply has resumed, but this meant we could not meet orders in Global Pet Care and Home & Personal Care during the third quarter, a situation that may persist into Q4. We also had to stop shipments to some customers due to inflationary pressures. Our strategy during such times is to maintain our margin structures through supplier concessions, cost reductions, and, regrettably, price increases. Each round of tariffs required us to inform customers of price hikes. Negotiating pricing with retail customers is never straightforward, but we usually aim for a satisfactory agreement. Unfortunately, when negotiations stalled, we had no option but to halt shipments and let discussions unfold. We recognize that our products are crucial for both retailers and consumers, and we must protect our financial health through pricing. With all the tariff challenges this year, even with reduced tariff levels from China, it was simply unfeasible for us to absorb all tariff costs without raising some prices. Some negotiations took longer than expected, necessitating shipment halts to certain key customers. The good news is that we now have pricing agreements in place with nearly all customers, and we are already seeing an increase in sales levels. However, taking the right long-term approach unfortunately meant sacrificing a significant amount of revenue this quarter. We also looked inward and made cost reductions by executing several layoffs across all divisions and corporate functions. We have either eliminated open roles or put backfilling them on hold. We adjusted our investment spending to reflect current market conditions and consumer demand, prioritizing investments that would yield the greatest impact this year and into the future. We have been reducing discretionary costs and downsizing our real estate footprint by optimizing office spaces, warehouses, and distribution centers. I am pleased to announce that despite these tough decisions, we expect to cut costs by over $50 million in fiscal year '25. Additionally, we have been working diligently to diversify our supplier base, creating alternatives for sourcing globally and activating non-Chinese opportunities. Our aim remains to achieve the lowest overall cost of supply in each market. For the U.S. market, sourcing outside of China may still not always be the most cost-effective option due to tariffs on goods from other Asian countries. However, given that recent tariff relations and U.S.-China trade agreements are still pending, Chinese sourcing may continue to be affordable. We need to be adaptable and ensure we can respond to marketplace volatility effectively. We are progressing towards our targets from the last call, with Global Pet Care aiming to establish non-Chinese sourcing for most of its purchases by the end of the year, while Home & Personal Care will continue to develop its non-Chinese sourcing strategy throughout fiscal '25 and into '26. The decline in Chinese tariff rates has provided some breathing room for these diversification efforts, allowing us additional time to address them. Should tariff rates change again, we would resume an expedited strategy to exit China while maintaining quality products that support our long-term objectives. With our initial pricing adjustments and supplier concessions, we are effectively reducing our tariff exposure as we close Q3. I take great pride in this achievement. Given known trade agreements among the U.S., European Union, and other relevant countries we source from, we are now targeting an additional $20 million to $25 million worth of pricing and supplier concessions across our three businesses to cover anticipated exposure leading into fiscal '26. Our ability to execute these necessary yet challenging decisions stems from our robust balance sheet. Our solid free cash flow, low business leverage, liquidity, and extended debt maturities not only sustain us but position us strongly in a volatile environment, especially in light of the material disruptions we faced due to tariffs recently. We will continue to act judiciously to ensure the long-term success and stability of our company. Let's turn our attention to Slide 7 for an overview of the Q3 figures. These numbers have been significantly affected by halting supplier inputs and suspending sales during pricing negotiations. Our net sales in Q3 fell by 10.2%. Excluding some foreign currency benefits, organic sales decreased by 11.1%. Both U.S. and European customers are feeling the economic pressures, leading to a decline across our pet and appliance categories. Sales were negatively impacted due to our difficult decisions to halt shipments to major retailers during stalled negotiations and inventory shortages from the pause in imports from China. In our Home & Garden segment, an unusually cold and wet start to the season adversely affected point of sale and retail reorder patterns during Q3. The adjusted EBITDA stood at $76.6 million, representing a $17 million decline compared to last year's figures, excluding investment income from our substantial cash reserves at that time. Our gross margins contracted by 110 basis points in the third quarter, driven primarily by unfavorable product mix, tariffs, and inflation. We responded swiftly to counteract these challenges by cutting fixed costs and curtailing external expenditures, ensuring that every dollar spent effectively drives top-line growth. The third quarter was about making tough yet right decisions to safeguard our operations and long-term success. Moving forward, we are optimistic as we begin Q4 with strong sales growth in July. Our Global Pet Care and Home & Garden divisions experienced growth compared to the previous year, and improved weather conditions in the latter part of Q3 bolstered retail ordering momentum into July. New products we introduced, like the Spectracide Wasp, Hornet & Yellowjacket Trap, and the Hotshot Flying Insect Trap are stimulating category growth despite increased competition, with Spectracide gaining market share. Global Pet Care continues to adapt despite prior supply constraints from our pause in Chinese imports, but all businesses are now shipping to all customers. In Global Pet Care, we achieved new distribution points and restored premium shelf placement for some products that had earlier been deprioritized. Our new GPC President has invigorated our team and is spearheading new innovations in health, wellness, niche treats, and cat food. Home & Personal Care performed well during Amazon’s Prime Day and is now supplying retailers with new innovations post-Chinese purchasing halt. We are dedicated to making investments that bolster our brands and drive category growth. Now, let’s go to Slide 8 for an update on our strategic priorities for the rest of fiscal '25. After revising our priorities last quarter due to the tariff landscape and softening consumer demand, we maintain our focus on making sound long-term decisions and staying agile amidst volatility. Our emphasis is on protecting our balance sheet, and we remain on track to generate approximately $160 million in free cash flow this fiscal year, close to $7 per share. During our last call, I mentioned that we would prioritize cash flow generation due to tariffs and market volatility. The reduction in Chinese tariffs has allowed us to shift focus back to normal operations while remaining committed to cash flow, liquidity, and reducing net leverage. We’re continuously identifying opportunities to enhance working capital across our operations and leveraging our supply chain strength to diversify sourcing. In the third quarter, our supply chain managed the transition from halting Chinese imports to restarting them while ensuring profitability. Our average global fill rates exceeded 95% despite the tariff-related shortages, and I commend the team for achieving this. High fill rates and service levels play a critical role during pricing negotiations with retail partners. We are adjusting our cost profiles to align with consumer demand and tariff challenges and will continue responding to macroeconomic conditions swiftly and resolutely, just as we have this past quarter. Our teams are concentrating on fewer, larger, and more impactful initiatives while preparing to capitalize on the growth opportunities economic uncertainty presents. We are actively seeking acquisition targets within our Pet and Home & Garden segments and believe that the right acquisitions will enhance growth and profitability for both our sides. We will remain disciplined during this process, ensuring appropriate asset evaluations. Our strategic efforts in the Home & Personal Care business continue to be delayed due to the current tariff landscape and global geopolitical issues outside our control. While this delay is disappointing, we are committed to maintaining and enhancing the value of the HPC business, with no permanent cessation of the transaction. Now, turning to Slide 9, I'll provide an update on share buybacks. During the third quarter, we repurchased nearly 1 million shares, amounting to 900,000 shares, continuing our purchases in the pre-earnings quiet period through a $50 million 10b5-1 plan initiated in June. Year-to-date, we've repurchased approximately 4 million shares for around $300 million. Overall, since closing the HHI transaction, we've returned approximately $1.32 billion in capital to shareholders through various share buyback programs, having repurchased 42% of our share count post-transaction. Recently, we have opted for more conservative repurchases to uphold our strong balance sheet and liquidity during Q3's volatility, remaining opportunistic in future repurchase strategies. Next, looking at Slide 10, we face ongoing uncertainty from global tariffs and trade negotiations, particularly between the U.S. and China, alongside a softening consumer demand in the U.S. and Europe. At this point, we lack enough visibility to offer a precise earnings outlook for '25. However, we affirm our expectation of delivering $160 million of free cash flow, close to $7 per share in fiscal '25. Before I hand the call off to Jeremy, I want to express my gratitude to every member of the Spectrum Brands team. The past 90 days have been challenging for all of us. Your hard work and dedication to overcoming the turmoil caused by tariffs have been commendable. I’m proud of how we handled it, and it's encouraging that better days are on the horizon. Though I hope we don’t have to face another tariff crisis, I trust this team to make the right decisions to drive our long-term success. Now, I’ll turn it over to Jeremy, who will give detailed updates on our financials and more insights by business unit, and I’ll return for closing remarks.

Jeremy W. Smeltser, Chief Financial Officer

Thanks, David. Good morning, everyone. Let's turn to Slide 12 for a review of Q3 results from continuing operations. We'll start with net sales, which declined 10.2%. Excluding the impact of $6.8 million of favorable foreign exchange, organic net sales decreased 11.1% primarily driven by targeted stop shipments to certain retailers, supply constraints, and category softness in our Global Pet Care and Home & Personal Care businesses as well as unfavorable weather in our Home and Garden business, with the cold and wet start to the season impacting the timing of replenishment orders. Gross profit decreased $38.7 million and gross margins of 37.8% decreased 110 basis points, largely driven by lower volume, unfavorable mix, inflation and higher tariffs, partially offset by pricing, impacts from cost improvement actions, and operational efficiencies as well as favorable FX. Operating expenses of $232.8 million decreased 8.7% due to lower investment spend in advertising and marketing and general expense management in light of the category softness and lower restructuring-related projects, partially offset by higher impairment charges in the quarter. Operating income of $31.3 million decreased by $16.4 million, driven by the gross margin decline partially offset by the lower operating expenses I mentioned. GAAP net income and diluted earnings per share both increased, primarily driven by lower interest expense, reduced income tax expense, and lower share count, partially offset by lower operating income and lower investment income. Adjusted EBITDA was $76.6 million, a decrease of $29.7 million, driven by investment income of $12.7 million last year, lower volume, and reduced gross margins, partially offset by continued general expense management and lower investments in light of category softness. Excluding last year's investment income, adjusted EBITDA decreased $17 million. Adjusted diluted EPS increased to $1.24, driven by reduced income tax expense, lower interest expense, and the reduction in shares outstanding, partially offset by lower adjusted EBITDA. Turning now to Slide 13. Q3 interest expense from continuing operations of $8.4 million decreased $7.3 million due to our lower gross outstanding debt balance. Cash taxes during the quarter of $14 million increased $9.6 million from last year. Depreciation and amortization of $25.1 million was flat to last year. And separately, share-based compensation increased to $4.8 million from $4.5 million last year. Capital expenditures were $10 million in Q3, essentially flat to last year. Cash payments towards strategic transactions, restructuring-related projects, and other unusual nonrecurring adjustments were $8.6 million versus $10.5 million last year. Moving now to the balance sheet. We had a quarter end cash balance of $122 million and $388.5 million available on our $500 million cash flow revolver. Total debt outstanding was approximately $681 million, consisting of borrowings on our cash flow revolver of $103 million, $496 million of senior unsecured notes and $82 million of finance leases. We ended the quarter with $559 million of net debt. Now let's get into the review of each business unit to provide details on the underlying performance drivers of our operational results. We will start with Global Pet Care, which is on Slide 14. Reported net sales decreased 9.6%, and excluding favorable foreign currency impacts, organic net sales decreased 11.4%. The primary driver of the sales decline was our decision to stop shipping to a handful of customers during tariff-related pricing negotiations. In the case of one key customer, the stop-ship lasted a number of weeks. By the end of the quarter, the pricing was in place and we had resumed shipping to this retailer, although our shipments were below normal levels. In addition, sales were negatively impacted by tariff-related supply issues attributable to the period during which U.S. tariff rates on Chinese products were 145%, and we had paused importing Chinese-sourced products. Sales in the early part of our quarter were also negatively affected by capacity constraints at a large retailer, causing the retailer to slow purchases for a period of time. Those purchasing patterns returned by the end of the quarter. These headwinds led to companion animals organic net sales being down low double digits for the quarter. In addition, while we maintained our market share, the overall North American companion animal category declined in the low single digits. We are pleased with the consumer reaction to our innovation and commercial activation, amplified by a successful collaboration with key retailers that resulted in expanded distribution and improved shelf placement. In EMEA, organic net sales for our Good Boy brand increased, driven by successful range reviews in the U.K. and a very successful launch into Germany and Austria. Yet overall companion animal sales were down low single digits driven by weakening European consumer sentiment and a sales push into Q4 due to customer warehouse constraints. Organic net sales in Latin America grew low double digits, predominantly in the chews category. In Aquatics, organic net sales declined in the low teens with sales declining in each region. In North America, consumer demand remained soft and sales were affected by the same pricing negotiation and weeks where we were not shipping to certain retailers. Distribution gains at Pet Specialty offset some of that softness. In EMEA, market share increased nicely. However, sales were impacted by lower consumer demand and the timing of order fulfillment. GPC's new leaders are focused on commercializing innovation to engage our retailers and consumers. Our recently launched DreamBone CollaYUMS continue our focus on introducing innovation that offers health and wellness benefits for pets. CollaYUMS are the only product in the market enriched with a Type 2 collagen derived from chicken cartilage benefiting hip and joint health while offering flavor that was liked by 100% of tested dogs. Good 'n' Fun is gaining points of distribution, including in pet specialty, and we will be launching new innovation in good and tasty treats in the next few months. Our investments in Nature's Miracle are gaining momentum. Nature's Miracle has an extraordinarily high loyalty rate driven by its best-in-class product performance. Our investments and partnerships with retailers and influencers to increase consumer engagement, along with our recently launched delivery systems featuring our patented flip and go technology, to enhance user convenience and drive consumer engagement is being well received by Nature's Miracle consumers. In dog and cat food, we went live with an IAMS grain-free line of products, and we are expanding countries of distribution within EMEA. In Aquatics, we are partnering with key retailers to feature our unique GloFish experience at the front of their stores, promoting the brand and its exciting innovation. This quarter's adjusted EBITDA of $44 million is $12.7 million lower than last year, and adjusted EBITDA margin was 17.2% compared to 20.1% last year. The reduction in adjusted EBITDA was primarily driven by lower sales volumes, unfavorable mix, and inflation, partially offset by operational productivity improvements, lower brand-focused investments, and FX. Looking forward, we expect cautious consumer behavior in North America, but we remain optimistic about our performance in the category with some recent wins in product distribution and placement, together with a positive pace of sales and consumer acceptance to our innovation. European consumer demand in the pet categories is also feeling the effect of the global economic uncertainties. Yet our Good Boy brand is performing well, and we have a promising innovation pipeline. We remain cautious about Aquatics, where some U.S. retailers are reducing shelf space due to lower consumer demand and recent growth trends. We are overall excited about the pet category and believe these short-term headwinds will be behind us in the near term. As a reminder, our prior year fourth quarter net sales were positively impacted by a non-repeating customer pull forward of approximately $10 million in purchases ahead of our SAP S/4HANA go-live last October. Let's turn now to Home & Garden, which is on Slide 15. Net sales decreased 10.3% in the quarter. The cold and wet start to the season delayed POS in our categories, negatively impacting retailer reorder patterns. Net sales in Controls, our largest business, were down low single digits, while net sales in household test, repellents and cleaning were down double digits. While total category sales in each of our categories were lower this quarter, Spectracide gained market share, with wasp and hornet pest control sales well above category and comps improving with the weather conditions towards the end of the quarter. In fact, Spectracide is the only top 5 brand that grew across the Controls category in the quarter from the data that we see. Hotshot also outperformed the category this quarter, growing in every indoor segment in which we compete, driven by our new products and innovation. Repel was the fastest-growing repellent brand in the category, where sales in the food, drug, and dollar channel this quarter were especially strong, while cleaning sales comparisons continue to be affected by the loss of distribution in the prior year. As the weather improved in the last weeks of June, we saw both POS and retailer reorder patterns improve. And as we closed the quarter, retailer inventory levels were generally flat year-over-year. Our innovation continues to gain support from our retail partners and interest from consumers. The Spectracide one-shot product line, our higher performance, longest-lasting product gained incremental off-shelf display support early in the season inside the home center channel and combined with the continued advertising support contributed to Spectracide market share gains this season. This year's innovation launch, the Spectracide Wasp, Hornet & Yellowjacket Trap continues to gain momentum with consumers and support from all of our key accounts. POS performance is well above expectations, and we are in the process of increasing capacity for fiscal '26. This product quickly gained penetration in the category, one of the highest of any new items in overall pest control. We also launched the new Hotshot Flying Insect Trap this season, in line with our brand strategy of offering strong benefits and significant value to consumers. This innovation was voted Product of the Year for Best in Pest Control. At a value price point compared to competitive products, the Hotshot Flying Insect Trap provides continuous action to attract and capture house flies and fruit flies with a discrete compact design that blends seamlessly into your home with no setup or electricity required. POS performance has been very strong, significantly surpassing expectations. Adjusted EBITDA was $38.6 million compared to $43.3 million last year, and the adjusted EBITDA margin was 20.4%, 10 basis points down from last year. The decrease in adjusted EBITDA was driven by lower volumes, inflation, incremental brand-focused investments, and negative mix offset partially by productivity improvements, favorable cost variances, and lower trade spend. Weather conditions improved in the final weeks of June and have generally remained favorable in the early weeks of our fourth quarter. In fact, we had record-high shipping weeks in July. Our retail partners continue to prioritize the lawn and garden category in their stores with off-shelf space and displays supporting consumer sales during the later breaking season. We are encouraged that the control season has extended this year compared to prior years with higher POS than typical carrying into the fourth quarter. Our fall crawl program is gaining momentum, with retailers recognizing the shifting seasonal patterns and opportunity to continue driving foot traffic throughout the fall, as consumers focus on controlling pests inside their homes and weeds in their yards. We are anticipating expanded retail placement for the fall crawl season, supported by incremental in-store displays, promotions, and media. Overall, the category remains competitive, and we plan to sustain our brand-focused investment throughout the fourth quarter. And finally, Home & Personal Care, which is on Slide 16. Reported net sales decreased 10.8%. Excluding favorable foreign exchange, organic net sales decreased 11.4%. Sales in the Home Appliance category were down mid-single digits this quarter, while sales in Personal Care were down double digits. Organic net sales in EMEA were also down double digits, driven predominantly by softness in Personal Care, and weaker consumer confidence across the region negatively impacted haircare sales in the quarter, offset by some favorability in shave and groom. Home Appliance sales were down low single digits due to continued softness in brick-and-mortar, partially offset by growth in e-commerce with growth in garment offset by a decline in food preparation. Overall, European consumer confidence remains cautious in the current geopolitical environment. North American sales decreased around 20%. Similar to EMEA, the sales decline in Personal Care was greater than the decline in Home Appliances. Throughout the quarter, the U.S. HPC team negotiated tariff-related pricing increases. And while pricing is now in place, those negotiations were dynamic and in some cases, required us to stop shipping product to certain retailers for a period of weeks. The negotiations for Personal Care in some cases lasted longer than those for Home Appliances, negatively impacting relative sales. Product availability and sales were also negatively impacted by the period during which we paused purchases from China. Consumer demand remains cautious, and retail prices for the category have hit the shelf. Organic net sales in Latin America grew low double digits with strong growth in both categories, driven by new product launches in Personal Care and cooking and coffee for Home Appliances. On the commercial side, we launched the PowerXL AIRMAX at Walmart this quarter. The AIRMAX is sourced from Indonesia and sell-in is exceeding our expectations. We're pleased with our launch on TikTok in the U.K., where our products are resonating well with consumers and monthly sales are growing. The PowerXL brand is developing strong brand awareness and positioning in Latin America across multiple countries and retailers. Our Remington Balder, the Circana-certified #1 brand of head shavers in the U.S., continues to win accolades, having recently been awarded the best overall head shaver by Men's Journal Magazine. We're launching a new Remington line, the AIRvive, in our international markets, and recently hosted 40 of our largest European customers at a unique Manchester United event to build on the regional brand strength and positioning of Remington internationally. We plan to launch the RV in the U.S. in the near term. This quarter's adjusted EBITDA was $7 million compared to $11.8 million last year. The adjusted EBITDA margin was 2.7%. The decline in adjusted EBITDA was driven by lower volumes, inflation, unfavorable mix, and tariffs, partially offset by pricing, lower brand-focused investments, and distribution costs and FX. We are actively streamlining our global business, reducing our fixed costs, and executing our plan to diversify our global sourcing footprint. We are pursuing a dual sourcing model to provide options to source either from China or an alternative country depending on which source of supply provides us with the lowest all-in cost. We also intend to significantly streamline and reduce our U.S. SKU count to simplify our supply chain and the lift of moving production out of China. With most of our pricing negotiations behind us, we should not have meaningful stop shipment situations in Q4, but do expect that we will have some supply constraints in North America due to the pause in purchases while the 145% tariff on Chinese imports was effective. Let's turn now to Slide 17. As David said, given the continuing instability regarding global tariffs, the unpredictable nature of global trade negotiations, and the continued cautiousness of consumers in the U.S. and Europe, at this time, we do not have sufficient visibility to provide an earnings framework for fiscal '25. We are, however, reaffirming the expectation that we will generate approximately $160 million of free cash flow for the year, actively managing our spend and working capital. In addition, with our sales performance in July, we do expect Q4 year-over-year sales to be improved from the 11.1% organic sales decline we experienced in Q3. To end my section, I want to echo David and thank all of our global employees for their hard work in these challenging times. Now back to David.

David M. Maura, Chairman and Chief Executive Officer

Thank you, Jeremy, and everyone for joining us on the call today. Let’s take a moment to recap the key takeaways from today’s discussion, which you can find on Slide 19. In our last call, I expressed confidence that we would navigate through the current tariff-related challenges and emerge as a stronger, more focused company and competitor. We made swift, difficult, and decisive decisions during Q3 to safeguard our long-term financial health. Q3's numbers are somewhat distorted due to months of halted product imports and weeks without shipments. We took immediate action without hesitation. We cut off supply from China when tariff rates on imports surged to 145% and higher. We promptly informed retailers of necessary price increases related to tariffs and halted shipping when negotiations broke down. We began developing dual sourcing plans to diversify our supplier base and routinely reassess these plans to ensure cost-effective sourcing options. We also worked quickly to eliminate fixed costs and discretionary spending. As I mentioned earlier, cutting $50 million in costs in 90 days was challenging, but I am proud of our teams for being proactive and achieving this goal. In a typical quarter, any of these actions would be significant, yet the team managed to accomplish all of them in Q3. We endured some setbacks during the quarter and made tough decisions, but those are now behind us. Our focus is on the future, and Q4 is starting off positively. We’re seeing more normalized sales compared to Q3, although we will still experience some supply constraints on certain orders due to the pause on Chinese purchases, particularly in appliances. However, we expect these issues to be resolved by the end of Q4. While consumer sentiment in the U.S. and Europe remains somewhat weak, there are signs of improving macroeconomic conditions. We anticipate that consumer confidence will stabilize once current geopolitical tensions ease. Weather conditions have improved for our Home & Garden sector, and we expect strong point-of-sale levels in the fall. We’re excited about the fall crawl season that Javier and the team are currently executing. We acknowledge that the hard work is behind us, but we understand there will be more changes and challenges ahead, requiring more tough but necessary decisions. I am optimistic that our team of 3,000 global employees will come together and tackle these challenges just as we did this past quarter. We will continue to leverage our competitive strengths, knowing that our brands, leaders, teams, strong cash flows, and robust balance sheet position us well. With Q3 behind us and a solid start to Q4, we are fully committed to finishing fiscal '25 strongly and setting the stage for a better 2026. Now, I’ll hand the call back to Joanne, and we look forward to your questions.

Joanne Chomiak, Senior Vice President of Tax and Treasury

Thank you, David. Operator, we can go to the questions for you now.

Operator, Operator

Our first question comes from Brian McNamara at Canaccord Genuity.

Madison Callinan, Analyst

This is Madison Callinan. First, could you reasonably quantify how much sales you left on the table by stopping shipments and other internal actions in Q2? And what impact, if any, lingers into Q4?

David M. Maura, Chairman and Chief Executive Officer

A lot and less.

Jeremy W. Smeltser, Chief Financial Officer

Yes. I mean I think, Madison, if you look all in, we would probably estimate it's in the neighborhood of $30 million in Q3. And to David's point, I think it will be quite a bit less than that in Q4.

Madison Callinan, Analyst

Okay. Great. And why is guidance still so difficult even with the improved clarity on tariffs? We've heard from other companies who are more exposed that have added like reinstated guidance or updated the prior outlook. Any color you could give us would be great.

David M. Maura, Chairman and Chief Executive Officer

Well, first, comparing ourselves to others doesn't bring joy. We focus on managing our own business. The key message I want to share is that we are moving forward with determination. I often use nautical terms since I grew up around boats, but we are facing challenges head-on, and I’m very proud of how we’ve handled this situation. If you are assessing the stock, don’t base it on Q3. That quarter has significant disruptions caused by shutting down inputs for two months and pausing sales for weeks to adjust pricing, along with cutting $50 million in costs. That’s a lot of changes in just 90 days, and I am very proud of the team for their efforts. We have indicated that things are improving significantly. July is starting off strong. However, the year has presented unexpected challenges due to tariffs. It’s still a fluid situation and it’s irresponsible to claim we can predict this with great accuracy. What we want to express is that we are now in Q4; we believe most of these challenges are behind us, and we are moving toward a more stable operational rhythm. We are advancing quickly and are preparing for a strong 2026, which is just two months away. We look forward to discussing this further with you in November. That’s the best way to explain our current status.

Operator, Operator

Our next question comes from Bob Labick at CJS Securities.

Unidentified Analyst, Analyst

This is Will on for Bob. You've been increasing your brand investment in recent years. Can you just talk about your capital allocation strategy in a soft consumer environment? And are there any changes to where you are investing?

David M. Maura, Chairman and Chief Executive Officer

Listen, I think the whole space is undervalued. I think anything that's facing the consumer, had any sort of tariff exposure to it, got destroyed from a share standpoint. I think the shares are dramatically undervalued. We keep buying them every single day. We have a very unlevered balance sheet to continue buying back shares. But I mean we've bought back almost half the float. And I guess if the shares want to stay down here, we're going to keep buying them. At the end of the day, I do want to do M&A. We chased the deal this quarter. Got really close, unfortunately got outbid. We have to maintain discipline when it comes to price and getting return on acquisitions. But we have a vision to triple our Pet business and double our Home & Garden business and find something accretive with appliances. And I want to maintain enough balance sheet flexibility to accomplish that and we may or may not take on partners to do it. But look, at the end of the day, I think the balance sheet is super healthy. We're super liquid. We want to go build an AOP plan and put together a much better '26, and we look forward to talking to you about that in November. We want to invest behind these businesses and grow them organically again. But we want to do accretive acquisitions and M&A. We think our pet platform is amazing. Super excited to have new leadership on board. I just got invited to a leadership meeting in St. Louis and gave them a little bit of a pep talk, but I was blown away by the opportunity we have both organically and strategically. As I talked about last quarter, we think if we can fill in some voids, whether it's wet food, whether it's cat, whether it's some of these treats as we try to expand into treats versus just being in chews all the while strengthening our core chews business, we think our pet platform's got a very exciting future. We've got a few gaps, health, wellness, food, cat, etc. We want to go fill those in with M&A. And so we're going to continue to pursue that. Home & Garden, I think there's a couple of things that are coming down the pipe that could fit really well with half year's business. So we've got tons of capital. Everybody calls us. Everybody loves our low leverage. And so there's tons of capital available to us. We have to be disciplined to find the right assets. In the interim, we'll keep buying shares.

Unidentified Analyst, Analyst

And just a follow-up. Has the M&A environment improved meaningfully with the new tariff map recently enacted? There's still too much uncertainty.

David M. Maura, Chairman and Chief Executive Officer

It's a combination of factors, right? There's a mix of uncertainty, and it's challenging to engage with assets that are struggling. You have to be cautious not to get involved in a losing situation. However, there is still a significant amount of capital available. As I just mentioned, we unfortunately lost out on an opportunity that seemed like a great match for us. Luckily, it was acquired by private equity, so we might have another opportunity in the future. We believe that, as noted by some of the larger private equity firms, sellers' expectations remain too high. Many bids are falling short of what is needed to make deals happen. Ideally, the gap between bids and expectations will close, leading to more transactions. While things are improving, the pace of that improvement is slower than we would prefer.

Operator, Operator

Our next question comes from Carla Casella at JPMorgan.

Carla Marie Casella Hodulik, Analyst

I wonder if you could give us a little bit more color on the pet category. And kind of if you're seeing a major channel mix there in terms of consumer preferences towards mass club specialty. And you talked about share gains, just more color on where you're gaining share or where the supply constraint you talked about. You talked about one retailer having supply constraints where that came from? Just any more color on Pet.

Jeremy W. Smeltser, Chief Financial Officer

Yes, I'll start by saying that it's interesting to observe the overall category continuing to decline, especially in chews and treats. This has been a significant challenge for everyone competing in that space, as we’ve experienced years of category growth. This trend is largely influenced by consumer sentiment and some shifts in purchasing behavior. We've faced these challenges for the last four quarters. However, in my prepared remarks today, I expressed a bit more optimism for a couple of reasons. Firstly, we successfully implemented pricing changes on chews, which is crucial since it represents our largest category exposure. Secondly, as we've mentioned in previous calls, the majority of larger players in the chews and treats market are sourcing from Asia, and so the tariffs affect everyone, including private labels. We've actually begun to improve our position against private labels in the U.S. market, which is encouraging. It's also important to note that Pet has been significantly affected by stop shipments. I believe if we hadn't experienced these stopped shipments and product availability issues, we would have seen sequential sales improvement from Q2 to Q3, indicating that it seems to have bottomed out and is starting to recover. We've at least maintained our share in terms of point of sale, even though our net sales were lower due to the timing of those stop shipments and trade fluctuations with retailers. This was primarily an issue in the U.S., but there were some similar constraints in Europe with a global customer facing warehouse challenges and excess product in their distribution centers, which delayed orders. Overall, we feel we are in a better position now than we were six months ago in the Pet category. We have our pricing strategy in place and a new team focused on revitalizing our messaging, both with our internal team and with retail partners. We are optimistic about the future as we look ahead to 2026.

Carla Marie Casella Hodulik, Analyst

Okay. Great. Can I ask about the timing of your shipping and your decision to delay purchases during the tariffs? Are you experiencing significant fluctuations in shipping or container rates, especially with others doing similarly?

David M. Maura, Chairman and Chief Executive Officer

No.

Jeremy W. Smeltser, Chief Financial Officer

Not anymore. No, we're pretty steady. We're pretty much on contract rates. We're really pleased with our relationships with ocean freight carriers. And I think I really don't see anything disrupting the normal pace in Q4 like we had in Q3. Obviously, barring some blow up in trade negotiations amongst the U.S. and countries that matter to our sourcing.

Operator, Operator

Our last question comes from Olivia Tong at Raymond James.

Olivia Tong Cheang, Analyst

I imagine. So I wanted to follow up a little bit on what was left on the table and of that $30 million, how much of that do you think you can make up or have made up already, if you could sort of parse that out between HPC and HNG to start?

Jeremy W. Smeltser, Chief Financial Officer

Yes, that doesn't really affect H&G, Olivia. It's more of an HPC and GPC issue in Q3. I think we've already recovered about half of it, which relates to the solid July that David mentioned, especially concerning some of the stop shipments. So there will be some impact. Product availability can sometimes lead to missing a bit of POS, but I believe that by the end of the year, it won't significantly affect our overall results.

Olivia Tong Cheang, Analyst

Got it. Sorry about that makes up on H&G. And then putting aside obviously the noise with the stock shipment and the stop ordering. What's your view in terms of consumer demand? We talked about this a couple of times in the call, but are you seeing any change in demand across price points? Are consumers looking for more value? Or are they holding the line? And then in terms of the pricing that you're planning, could you talk about how much on average and sort of the range that you're looking for and when that's getting implemented?

David M. Maura, Chairman and Chief Executive Officer

I'll start and then Jeremy can add his thoughts. I've been surprised by the resilience of consumers, considering everything they’ve faced. We noticed some weakness in the U.S. last fall heading into this year, and Europe seemed to follow. There’s still some uncertainty, but I personally believe we’ve moved past most of the significant volatility and the fears caused by fluctuating tariff rates and the unpredictability of global trade. As things settle down, I believe consumer sentiment will begin to improve worldwide. If we can also achieve some rate cuts, that would be beneficial. We’ve clearly seen that people are being more careful and selective in their spending. This is why we're optimistic about our strategy to reset our brand presence, improve shelf placement, and promote our branded product, which drives margin, turnover, and traffic for our retailers. Achieving that this quarter in the Pet category is a positive sign. Overall, I would say consumers have shown more resilience than I expected. We have innovative products on the way, but it will take some time to gain traction since we've just introduced new leadership. We're excited about our organic growth potential. We need a few months to develop our Annual Operating Plan and prepare for 2026, after which we can provide more details. What would you like to add?

Jeremy W. Smeltser, Chief Financial Officer

I agree with everything David mentioned. When discussing consumer behavior, it's important to compare our experiences in the Pet category to those in Home & Garden, especially with their distinct brand strategies in the U.S. Our Home & Garden business consists solely of value brands. Even with strong innovation, our products are perceived as value compared to other brands, and we are gaining market share across all categories. Consumers are clearly seeking value, which aligns with what our major retail customers have said in their earnings calls. In the Pet category, we've faced challenges in maintaining market share over the last three to four quarters, mainly due to the rise of private label brands. However, things are beginning to improve. This reflects the reality of consumer preferences. Notably, when we reduce prices or offer promotions on our premium brands, consumers return to these products, indicating that they still prefer branded merchandise. I feel optimistic about our situation heading into 2026. Currently, it's still early in the fourth quarter, and we've recently established trade agreements with strategic countries. Many of these agreements involve pricing above the 10% tariffs we were working with. We're aiming for only $20 million to $25 million of additional pricing and supplier concessions on an annual basis for 2026 to address this, which is a relatively small amount in the context of our $3 billion revenue across three diverse businesses. Thus, the pricing increase we anticipate is less than 1% overall. Moving forward, our approach will be strategic and targeted, focusing on revenue growth management in collaboration with our retail partners, all while aiming to protect our profit margins as David has emphasized.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn it back to Joanne for closing remarks.

Joanne Chomiak, Senior Vice President of Tax and Treasury

Thank you. And with that, we have reached the top of the hour, so we will conclude our conference call. Thank you to David and Jeremy. And on behalf of Spectrum Brands, thank you for your participation this morning.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.