Earnings Call Transcript - SPB Q3 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the Third Quarter 2023 Spectrum Brands Holdings, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Vice President of Strategic Finance and Enterprise Reporting, Faisal Qadir.

Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting

Good morning, everyone and welcome to Spectrum Brands Holdings Q3 2023 earnings conference call and webcast. I'm Faisal Qadir, Vice President of Strategic Finance and Enterprise reporting, 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 two 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 slide three and four. Our comments today include forward-looking statements, which are based upon management's current expectations, projections and assumptions and are, by nature, uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August 11, 2023, our most recent SEC filings and Spectrum Brands Holdings' most recent annual report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement. Also, please note that we'll discuss certain non-GAAP financial measures in this call. Reconciliation 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?

David Maura, Chairman and CEO

Hey, thank you, Faisal. Good morning, everybody. Welcome to our third quarter earnings update. And I want to thank all of you for joining us today. As usual, I'll begin with an update of the company's strategic initiatives followed by an overview of our operating environment. Jeremy will then provide a more detailed financial and operational update, including a discussion of the specific business unit results. I'd like to start today's call by thanking and congratulating our Spectrum Brands colleagues around the world for all their efforts and tireless dedication to the company. I am very proud of the Spectrum Brands team for managing through these unprecedented challenges this year, including significant inventory demand volatility from our retail customers and the unanticipated DOJ lawsuit to block the sale of our HHI business unit. Our retail customers' inventory management strategies have made it exceedingly difficult for our business units to accurately forecast sales. The lawsuit and protracted timeline for the closing of the sale of HHI imposed a number of challenges, including executing our business strategies, maintaining employee morale with the uncertainty of the transaction, and adjusting our operating and working capital use strategies to comply with covenants under the HHI operating transaction agreements and our debt instruments. I'm truly grateful to the Spectrum Brands team for managing these challenges and getting us to the close of the HHI transaction, which has placed us in a materially better position to deliver on our operating and strategic plans for our company. If I could move your attention now to slide six. As a reminder, we completed the sale of HHI to ASSA ABLOY for $4.3 billion in cash on June 20, subject to customary purchase price adjustments. And we expect $3.8 billion in net proceeds after fees and taxes. With the close of this transaction, we have now become a net debt-free company as we ended the quarter with $2.9 billion of cash in the bank and total debt of $2.1 billion. As we had indicated during our last earnings conference call, we've begun the process of deleveraging our balance sheet, and we have repaid $1.1 billion of bank loans since receiving the HHI sales proceeds. We also received Board authorization for a $1 billion share buyback plan and we entered into and funded a $500 million accelerated share repurchase program that continues to transact in the market today. Additionally, since the end of our quarter, we have repaid another $450 million of our outstanding debt by calling our 5.75% 2025 senior unsecured notes, which were callable at par. We are going to patiently and thoughtfully explore various options for the use of the remaining proceeds while we continue to earn investment income on our cash balances at rates that are well above our average cost of debt. On the strategic front, we remain committed to finding strategic and organic ways to enhance the value of our Home and Personal Care business. We are very focused on turning that business around, improving its profitability, while we continue to explore our strategic options. Now moving to our operating environment and financial results. I'd like to focus on two key messages. First, we are facing further short-term headwinds that are driving additional pressure on our top line, particularly in our Home and Garden business. That said, we remain confident in the long-term trajectory of our businesses, and we are seeing strong sequential profitability improvements. Secondly, our cash flow focus has paid off, and the company's balance sheet has never been stronger. We are now able to make decisions that are going to set up the business for long-term profitability and success. Building on the first theme, cooler-than-expected weather conditions and greater-than-expected reduction of retail inventory levels negatively impacted our third quarter sales in our Home and Garden business. We now expect this season and Home and Garden sales to be worse than we previously anticipated. We also continue to see pressure in the small home appliance space due to lower consumer demand and continued higher-than-expected retail inventory levels. Our financial results reflect these conditions as our total sales declined 10.1%, while our organic sales declined 9.7%. Jeremy will provide more details by business unit in his comments. However, we are seeing the benefits of our earlier actions on cost reductions and price increases that are sequentially improving our gross margin rates. On the cost side, we remain focused on simplifying our business model and reducing costs further to operate as a leaner organization with a renewed financial discipline. To that end, we are seeing the benefits of our fixed cost reduction efforts. In fact, our EBITDA margin increased by over 600 basis points sequentially to 13.4% in the third quarter. With all the cost actions in place, we believe we are well-positioned to face these short-term headwinds while maintaining our key capabilities necessary to continue to now invest in the long-term growth of the business. If I could build on the second theme for a moment, you may recall, we started the year with our end markets in decline, especially in the Home and Personal care space, and our leverage peaked at over six times during this fiscal year. Our immediate focus at the beginning of the year was therefore on cash flow generation and cost management to the detriment of our sales and EBITDA growth. On that front, we have delivered strong performance by reducing our inventory levels by over $250 million since the end of fiscal '22. As I mentioned earlier, with the completion of the HHI sale, we are now in a net cash position. With the strength of our balance sheet and our current cash balance, we have made the decision to discontinue our participation in various receivables factoring and early pay programs that we have historically taken advantage of to shorten our working capital cycle. Although these programs are a great vehicle when they're needed, they come at a cost, and that cost has been increasing with the backdrop of a much higher interest rate environment. We expect that the exit of these programs will result in one-time operating cash usage of over $250 million in the current fiscal year and potentially another $100 million in fiscal '24. Although our focus on the balance sheet has yielded significant reductions in our inventory balance, inventory at retail partners remain at an elevated level. We also continue to have some excess inventory, particularly in kitchen appliances. We are evaluating various alternatives to ensure we can improve the health of our inventory as we get ready to enter fiscal 2024. Moving to slide seven and our high-level fiscal '23 earnings framework, we remain pleased with the earnings performance of our Global Pet Care business, and we continue to see improvements in the Home and Personal Care business despite the headwinds in its end markets. We also remain very confident in the long-term strategy for our Home & Garden business, but we do expect this to be a difficult year for this business unit due to the cooler-than-expected weather and retail inventory-related sales declines. Given the additional pressure in the Home & Garden business in the second half of this year, we expect to be towards the lower end of our earnings framework, excluding the investment income from the HHI proceeds. Now I'll let you hear more from Jeremy on the financials and specific business unit updates and insights. I'll turn the call now over to you, Jeremy.

Jeremy Smeltser, CFO

Thanks, David. Good morning, everyone. Turning to slide nine and a review of Q3 results from continuing operations. I'll begin with net sales, which decreased 10.1%. Excluding the impact of $3.5 million from unfavorable foreign exchange, organic net sales decreased 9.7% due to lower consumer demand in hard goods and consumer durables and reduced customer replenishment orders as they focused on inventory reduction, particularly in Home & Garden and kitchen appliances. Gross profit decreased by $12.5 million with the reduction in volume, while the gross margin of 35.8% increased by 210 basis points from a year ago due to improved pricing, cost improvements, and a favorable mix. Operating expenses of $388.2 million increased by about 60%, driven by the recognition of an impairment of HPC goodwill of $111 million and intangible asset impairments of $54 million, offset by fixed cost reduction efforts initiated last year and continued this year, as well as overall spend management. The operating loss of $124.7 million resulted from the sales decline and the goodwill and intangible asset impairment charges I mentioned. The GAAP net loss and decrease in diluted earnings per share were mainly driven by the increase in operating loss and higher interest expenses. Adjusted EBITDA was $98.5 million, increasing despite the volume decrease due to the positive impact of pricing, fixed cost reduction efforts, overall spend management, and investment income of $5.3 million from the HHI proceeds. Adjusted diluted EPS increased by $0.21 to $0.75 per share, driven by higher adjusted EBITDA and the reduction in shares outstanding. Turning to slide 10, Q3 interest expense from continuing operations of $38.9 million increased by $12.9 million due to a higher interest rate on our variable rate debt and $8.6 million of noncash fee write-off from our debt repayments. Cash taxes for the quarter of $9.9 million were $3.5 million higher than last year. Depreciation and amortization from continuing operations of $22.6 million was $2.8 million lower than the previous year. Share and incentive-based compensation increased by $5.5 million. Capital expenditures were $18.4 million in Q3 compared to $20.9 million last year. Cash payments for strategic transactions, restructuring-related projects, and other unusual non-recurring adjustments were $10.3 million compared to $29.3 million last year. Moving to the balance sheet, the company had a quarter-end cash balance of $2.9 billion and $587 million available on our $600 million cash flow revolver. Total debt outstanding was approximately $2.1 billion, comprising $2 billion of senior unsecured notes and $89 million of finance leases and other obligations. Additionally, we ended the quarter with a net positive cash position compared to a pro forma net leverage of 6.3 times at the end of the previous quarter. Now let's review each business unit to provide details on the underlying performance drivers of our operational results. I'll start with Global Pet Care on slide 11. Reported net sales decreased 6.2%. Excluding favorable foreign currency, organic sales decreased 6.4%. The net sales decline was driven by continued softness in the global aquatics marketplace, particularly in the equipment and environments subcategories, which had benefited from higher-than-average pandemic-driven demand. Alongside lower aquatic sales, North American sales were negatively impacted by aggressive portfolio management activities, leading to the exit of several non-strategic categories such as waste management and the discontinuance of hundreds of lower profit SKUs. These efforts will reduce our North America active planned item count by nearly one-third. While this top-line impact is a purposeful headwind, it positively affects margins, turns, and cash flow. Sales in EMEA rose due to growth in the companion animal category, mainly driven by our dog and cat food sales, which more than offset similar declines in aquatics. All planned price increases in EMEA announced during the first quarter have now been successfully implemented, with the final customers applying pricing early in the third quarter. Sales were supported by the annualization impact of multiple pricing actions from last year and the benefits of new price increases this year. On the cost side, we continue to see net inflation in line with our expectations, with declining freight rates partially offsetting material, energy, and labor inflation. We will keep a close watch on these input cost trends and adjust pricing strategically as needed. On the innovation front, in the U.S., we are excited to announce the official availability of our new cat treats line on chewy.com, soon to expand to other retailers. This is our initial entry into the U.S. cat treats market, valued at roughly $2 billion, featuring three patented innovations: Stary Spinners, Savory Spoonables, and Triple Flavor Kabobs. In EMEA, we have also expanded our IAMS Vitality and IAMS Delight cat ranges and recently launched a new line of Eukanuba wet cat food. The cat nutrition and treats markets are among the fastest-growing categories, enhancing our long-term growth potential with these product expansions. Adjusted EBITDA for GPC increased by 31% to $53.6 million, mainly driven by favorable pricing, incremental pricing actions in EMEA, the exit of low-margin SKUs, and cost reduction measures, including last year's fixed cost restructuring and further actions taken this year. This was partially offset by lower volume. We remain cautious about certain categories within the pet specialty channels, like aquatic environments, as rates of new entrants have settled at or below pre-pandemic levels. However, we expect positive trends in companion animal consumable categories to mostly offset these pressures. Overall, category fundamentals are strong within consumables, especially in nutrition-based categories, which is promising as our business increasingly aligns with consumable products for pets, representing over 85% of our Q3 revenues. As margins improve, we are shifting focus to invest more in advertising and trade promotions to engage consumers, drive top-line growth, and increase market share. The GPC team remains dedicated to executing our long-term strategy, emphasizing trust through unique and innovative products to drive demand for our leading brands. Our pet business has historically shown resilience, and we believe in its growth potential. Now moving to Home & Garden on slide 12, net sales decreased by 6% in the third quarter due to cooler-than-expected weather conditions across key regions, which led to weak point-of-sale and lower replenishment sales from key retail partners. The lower point-of-sale, particularly in May and June, encouraged retailers to remain conservative in their inventory planning and to further reduce inventory during the quarter. Adverse weather, particularly in the Southeast, negatively affected the overall pest control category's point-of-sale. Despite these conditions, we are seeing growth in our controls category with our Spectracide brand, which leverages strong brand positioning that delivers great efficacy at great value for consumers. However, we face challenges in the household category with our Hot Shot brand as the competitive landscape has become more intense, with key competitors making significant investments in promotions at retail and top funnel advertising. Overall volume decline was partially offset by price increases. The retailer strategy shift to maintain significantly lower inventory compared to last year also continued to affect our third-quarter results. We expect this trend to persist, anticipating retailers will target historically low inventory levels at the end of the season. This continued inventory reduction will impact our sales expectations in Q4. Nonetheless, July has seen a strong recovery of point-of-sale driven by both incremental support for our brands, which are trending positively in Q4, and warmer weather. Adjustments to our cleaning and restoration product sales showed some growth, although category demand for cleaning products continues to decline post-COVID, keeping our performance in the category below expectations. We plan to increase investments in our Rejuvenate brand to drive top-line sales as part of our renewed long-term growth strategy. We’ll capitalize on positive market momentum as consumers recognize the strong value and efficacy of our products. Rejuvenate has been ranked as a best value for floor cleaning systems by Better Home & Garden magazine. Significant commercial innovation continues across our Home & Garden portfolio. In controls, we are expanding our Spectracide One shot platform to several other products, which strategically provides superior performance for results-driven consumers while maintaining a strong value model. Our new zone mosquito repellent devices, Cutter Eclipse and Repel Realm, continue to gain consumer traction. We will expand these product lines into new national accounts and keep building excitement for this new offering. We are closely monitoring point-of-sale and coordinating with our retail partners to ensure that we can meet consumer demand. However, as I mentioned earlier, we expect further retailer inventory reduction actions in the fourth quarter in parts of the channel. Adjusted EBITDA for the Home & Garden business was $38.6 million, primarily driven by the sales decline. This was partially offset by positive pricing and benefits from fixed cost restructuring and cost improvement initiatives, although higher product costs from raw materials and labor met our expectations. Looking forward to the remainder of fiscal '23, we anticipate fourth-quarter sales to be impacted by continued retail inventory reduction, leading us to expect a full-year sales decline. While we believe that the consumer market fundamentals are strong, it has been a difficult year for our Home & Garden business because of retail inventory strategies challenges. Lastly, in Home & Personal Care on slide 13, reported net sales decreased by 16%. Excluding the unfavorable foreign exchange impact of $4.3 million, organic net sales decreased by 14.7%. The unfavorable foreign exchange impact was mainly due to currency volatility in Latin America. The organic net sales decrease stemmed from continued declines in consumer demand for kitchen appliances and retailer inventory reductions in North America. Overall, global sales in personal care appliances increased. EMEA region sales showed double-digit growth in both the personal care and kitchen appliance categories as we continued to thrive in the marketplace, gaining share through e-commerce channel growth. LATAM and APAC also reported strong growth. However, the North America business operates in a challenging competitive environment, with the small kitchen appliance market down mid- to high single digits in this quarter. Retailers’ inventory of air fryers and toaster ovens has been reduced as demand stays below pandemic highs. We anticipate continued pressure for these product lines throughout the year as retailers work down inventory through restrained replenishment orders. Consumers are seeking deals as retailers and competitors maintain heightened promotional levels in the marketplace, putting further pressure on our results. Adjusted EBITDA rose to $11.4 million, with the higher adjusted EBITDA margin driven by lower inventory costs and positive year-over-year pricing. Ocean freight rates have continued to decline from their pandemic peak, and we are improving margins through various cost initiatives, including the fixed cost restructuring we've implemented over the last two years. This was partially offset by lower volume and unfavorable foreign exchange rates. Looking ahead, we still expect soft consumer demand, particularly in the air fryer and toaster oven categories, and anticipate ongoing competitive challenges in North America as retailers persist with their inventory reduction strategies. Therefore, we will focus on actions to reduce inventory both in the channel and our own. Commercially, we are concentrating on introducing fewer, larger, and better consumer-relevant innovations that enhance our current market position and streamline our operational model. Now turning to slide 14, we'll update our expectations for 2023. As David noted, due to the added revenue pressure in Home & Garden in the second half of the year, we expect to be toward the lower end of our earnings framework, excluding investment income from HHI proceeds. Additionally, we anticipate around $30 million of investment income in the fourth quarter based on the current interest rate environment. Moving to slide 15, we expect depreciation and amortization to be between $105 million and $115 million, including stock-based compensation of approximately $15 million to $20 million. Full-year interest expense is projected to range between $120 million and $130 million, including about $15 million of noncash items. Cash payments for restructuring, optimization, and strategic transaction costs are expected to be between $65 million and $70 million. Capital expenditures are anticipated to range between $55 million and $65 million. Cash taxes, excluding any gain on the sale of HHI, are expected to be between $25 million and $35 million. For adjusted EPS, we typically use a tax rate of 25%, including state taxes. To conclude my section, I want to thank all our global employees for their hard work during these challenging times, and we remain committed to our long-term strategic initiatives. Now back to David.

David Maura, Chairman and CEO

Thank you, Jeremy. Thanks, everybody, for joining us on the call today. I'd like to take a couple of minutes to recap the takeaways here on slide 17. First, with the successful close of the HHI sale, we are now operating in a net cash position compared to over six times leverage in the previous quarter. We've already taken steps to deleverage our balance sheet and are returning capital to our shareholders. We are continuing to explore the deployment of the remaining proceeds to drive the best outcome for all of our stakeholders. This transaction also has brought us closer to our long-term goal of becoming a faster-growing, higher-margin pure-play Global Pet Care and Home & Garden Company and will allow the team to now devote the resources to and prioritize the long-term growth of our remaining businesses. Second, with the successful close of HHI, we are even more focused on our core businesses, and we have successfully pivoted the teams to focus on profitability and long-term growth. Last, we are facing additional headwinds in our Home and Garden business related to weather and retail inventory levels that were more severe than we expected. We remain confident in our long-term strategy here and our ability to deliver value to our customers. We are, therefore, maintaining our earnings framework for fiscal '23, excluding investment income, but expect to be toward the lower end of that guidance range. I want to close by reiterating that I'm optimistic about the future of our company, and I believe we are well positioned to execute on our operational goals and return our company to earnings growth in fiscal '24. I'm very excited about the strategic pivot after the sale of HHI, and I want all of us to know that the future of Spectrum Brands is bright. I'll now turn the call back over to Faisal for questions. We look forward to hearing from you.

Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting

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

Operator, Operator

Thank you. One moment for our first question. It comes from Bob Labick with CJS Securities.

Peter Lukas, Analyst

Yes, hi, good morning. It's Pete Lukas for Bob. Can you talk a little bit about how you think about a possible sale divestiture of HPC? What are the likely options and potential timeline, if any?

David Maura, Chairman and CEO

Yes. Look, I mean, we definitely want to stand that up and create a separate business. And we were optimistic we could get that done sooner, but we've clearly entered a year of unprecedented, I would call it a post-COVID hangover, where everybody bought a lot of durable goods. I think in the last year, you can definitely see money flows out of durables and consumables. And I think particularly here in the U.S., given the stimulus payments, you just see a lot of money flowing into the services space and so your airlines are full, your restaurants are full. People are traveling to Europe. I heard there's a lot of Americans in Italy this year, this summer. But we do think that given the bankruptcy of one of our competitors in the space, stress on some of the other players, this should revert a little bit more toward the mean. And we want to be responsible when we spin merge or put this unit on its own. We need it to be financially healthy. So we definitely want to take the next couple of quarters to see if we can't get the earnings profile of our appliances business on a much better trajectory and we'll continue to assess as we enter and go through fiscal '24. But our strategic objectives remain the same. I would just say it's been a little bit delayed.

Peter Lukas, Analyst

Great. And then jump into the M&A environment. What are you looking for in terms of acquisition criteria? And how do you evaluate that versus additional share repurchases?

David Maura, Chairman and CEO

I don't see any opportunities in the market for acquisitions right now. I believe our shares are more valuable than any potential outside investment. We need to focus on our core business. Considering the challenges we’ve faced with the government, the pandemic, inflation, and supply chain issues, we are eager to achieve a solid balance sheet. Our goal is to invest in growth and strengthen our operations, making them stable and expanding. This is our primary focus for fiscal '24.

Peter Lukas, Analyst

You mentioned Pet and Home and Garden and how the disruptions caused by the pandemic affected the earnings potential of those segments. Can you share your thoughts on the medium-term growth outlook and the key factors driving that growth? I know you touched on some consumables in the pet segment, but I'm curious about the main drivers we should consider for both segments.

David Maura, Chairman and CEO

I'll focus on the key points and then hand it over to Jeremy or Faisal for more details. The Pet Care business is a great market, and we've seen a significant increase in pet ownership during COVID. However, there are reports of people considering giving up their pets due to tighter discretionary budgets. Despite this, we believe the companion animal market is still in a growth phase. We had to implement significant price increases due to inflation, which impacted unit volumes. Being heavily leveraged throughout much of this fiscal year has limited our ability to actively pursue growth drivers. We aim to refocus on marketing and investing in our brands. We recently launched a new cat treat line on Chewy, which is innovative and exciting. The press release from our Pet team highlighted our "Meowee!" brand, which we introduced to the U.S. market through the acquisition of Armitage Good Boy. We are optimistic about growth in the pet sector for 2024, though we face challenges with the higher prices of durable goods like fish tanks. We're also looking to boost growth in aquatics with upcoming initiatives. On the other hand, I'm disappointed with the Home & Garden business this year; our expectations were higher. The problem lies in the seasonal nature of our sales, which predominantly occur within a 90-day window. Unfortunately, our sales team didn't anticipate the amount of inventory retailers were looking to move back to pre-2019 levels. During the pandemic, there was a surge in yard activity, leading to significant orders from our retail partners and strong factory shipments. However, there's been a slowdown, and it seems everyone is adjusting their stocks now. Weather conditions have not been favorable either. We saw some improvement in July, but it's too late in the season for this to make a significant difference.

Peter Lukas, Analyst

Very helpful. Thanks. I'll jump back in the queue.

Operator, Operator

Thank you. One moment for our next question, please. It comes from the line of Peter Grom with UBS.

David Maura, Chairman and CEO

Hi, Peter. How are you doing?

Peter Grom, Analyst

I’m doing good. How are you?

David Maura, Chairman and CEO

Same, feeling a lot better going to bed with cash in the bank.

Peter Grom, Analyst

Maybe just one quick housekeeping item. The $250 million impact from exiting receivables factoring that you mentioned, did any of that occur in the third quarter? Or is that all still yet to come?

Jeremy Smeltser, CFO

Pretty small amount in the third quarter, Peter, most of it is in Q4.

Peter Grom, Analyst

I would like to understand the company's earning potential, not necessarily in the long term. David, you've mentioned the $400 million target for some time, but as we approach the end of this year and are well below that figure, how much of the gap do you believe can be closed in 2024? You previously talked about some significant capitalized variances. What are your thoughts on how we can get back to the $400 million target? Do you have any timeline for this? Additionally, if there are any specific building lots you would highlight for 2024, that would be helpful. Thank you.

David Maura, Chairman and CEO

Yes. We acknowledge the situation, and I recognize that my earlier statement was premature. I didn't anticipate the significant decline in earnings affecting our small appliance division. The current circumstances in that industry are quite extraordinary. I regret that we're not more accurate in predicting our Home and Garden factory sales. This appears to be a lengthy process, and we must improve our operations. I am dissatisfied with our operational performance this year. We've brought in some new talent, implemented new strategies, and introduced new products. However, I want to be cautious. It's important to note that our balance sheet is stable. I see 2023 as a year to get our operations in order regarding working capital. Dave Gabriel has done an excellent job improving our inventory health. The completion of HHI has positioned us well, as we now have more cash than debt, and we are actively reducing our debt while buying back shares to return cash to our shareholders alongside paying dividends. We have significant work ahead in 2024 to rebuild our credibility in operations and drive revenue. In this quarter, you can acknowledge that management has made strides, having started cost-cutting measures a year ago and adjusting pricing, resulting in a notable increase in our margins. If we can maintain this improved margin structure and boost our top-line growth, it will benefit all of us as shareholders. We need to exercise caution, allowing our numbers to speak for us instead of relying on these calls. So please stay tuned.

Peter Grom, Analyst

Thanks so much. I’ll pass it on.

Jeremy Smeltser, CFO

Thanks, Peter.

Operator, Operator

One moment please for our next question. It's from the line of Chris Carey with Wells Fargo Securities.

Chris Carey, Analyst

Hey, good morning.

Jeremy Smeltser, CFO

Good morning.

Chris Carey, Analyst

I just wanted to follow up on Peter's line questioning just about next year. I think it's totally reasonable to speak to a more kind of conservative phasing into that earnings power, which completely makes sense. I guess I'm also just looking at EBITDA consensus up almost 20% next year and you're talking about the need to reinvest, drive top line. What is the balance between delivering margin and getting your top line going again to kind of build a more durable long-term model, clearly, with your cash balance, you have room to invest to get some of that momentum going again. So I just wonder how you think about the balance of top line and EBITDA in the context of what seems like pretty substantial growth expectations for EBITDA going into next year?

David Maura, Chairman and CEO

I'll let the team address that. I believe you understand that in 2023, we worked on fixing the balance sheet, and in 2024, our focus will be on improving the P&L. It's important to note that progress is not always linear, and while I want to see better performance, I also don't want to overcommit. I dislike reducing projections and didn't enjoy doing that this year, and I certainly want to avoid it next year. The challenge with being a public company is the pressure to provide guidance, which is expected. However, prioritizing long-term business health can sometimes affect quarterly results. We recognized early this year that we were facing a tougher situation than anticipated, which led us to focus on cash flow and working capital. Being in a difficult spot with bank covenants, like some competitors are currently experiencing, can distract the organization and limit growth resources. We dedicated this year to reducing our inventory levels and improving our inventory turnover, which I believe we achieved. While I don't rate our performance in sales or EBITDA highly, I hope next year tells a different story, and I want to ensure the team stays grounded. We aim to provide a solid outlook, but we must work on building credibility. Jeremy, would you like to add your thoughts?

Jeremy Smeltser, CFO

Yes, Chris, look, I think good question. I understand the question. Obviously, we're a quarter away from providing our thoughts on fiscal '24, which we'll do in November. But I think it's important to look at each business because they're all in a little bit different place, right? So if you look at the third-quarter results with the Global Pet Care business, EBITDA above $50 million, I think we're getting back to where we wanted to be as we expected and profitability in that business. And now it's really about growth. In the quarter, we were down a little over 6% organically. About half of that was just from SKU rationalization, so purposeful. And we're starting to annualize the impact of the aquatics environments being down big. So I think there's a path to return to top-line growth. And as you can see, in third-quarter results, it leverages well in that business. So I think we're in a good place there. I think Home & Garden, as always, it's a complicated business and a difficult business to forecast for us, for you guys, for shareholders based on the weather. What we do know is that our sales were significantly below our POS this year based on the retail inventory reduction. We'll thoughtfully analyze that, do our best to estimate what we think '24 looks like. We'll talk more about it in November. But fundamentally, we like the business. We like the consumable nature of it. We like the efficacy and the value for consumers, and we think it's an excellent trade down in difficult economic times. So I think it was good growth potential there to get back to where we've been in the past. Just not quite sure how long it takes to get back to the previous peak EBITDA levels, but we'll give more thoughts on it in 90 days. And then HPC, David and I talked a lot in our prepared remarks, it's really the tale of the different regions in the world. I mean EMEA, LATAM, APAC have really all recovered from the post-pandemic glut of inventory and kind of lack of people being at home. And actually, I think, as we talked about, they all posted growth on the top line. And you can see our third-quarter results improved substantially from an EBITDA perspective from Q2 to Q3. So we're pleased with that, but we've still got to deal with this U.S. issue, and it's a tough issue. It's affecting us, all of our peers. You've seen bankruptcies in the space. So it's not a '24 full recovery in that space because of what's happening in the U.S. But as it relates also to your question on how do you think about ramping up investment in the brands. The reality is, to David's point, we've been pretty handcuffed and we're not now. And so in Q4, really all three of the businesses are modestly starting to ramp up investments back in the brands. And we'll just measure returns on that very thoughtfully and pragmatically as we go through Q4 and then that will really give David and I the visibility to how much brand investment we will authorize for fiscal '24, because we want to see the return on that. So that's kind of full some thoughts on it. Again, we can't provide guidance on '24 today. We're not going to, but that's kind of the state of the union.

Chris Carey, Analyst

Okay. That's helpful. I have a couple of quick modeling questions. For Q4, do you expect your share count to be significantly lower than in Q3? It seems like the ASR is continuing this quarter. Will the ASR be lower this quarter? Shares were only down about 0.5 million from the previous quarter. Should we anticipate a more substantial decline in Q4 compared to Q3? And then I have one more question and I'll be finished.

Jeremy Smeltser, CFO

Yes. So we retired 5.4 million shares at the start of the ASR. I believe that was on June 21 or 22. But the share count in the quarter is an average share count across the quarter. So you didn't get much of an impact of that with just eight or nine days. So you will see a substantial step down to the tune of that 5 million share count in Q4 regardless of whether the ASR is completed, and we don't have direct visibility to when it will be completed, but that will happen regardless and that's the whole point of the ASR. You can retire 80% of the shares upfront.

Chris Carey, Analyst

Okay. My second question is about free cash flow. Since the factoring program is primarily focused on Q4 and Q3 seemed weak, I'm trying to understand the situation. You mentioned converting about half of the EBITDA, but it appears that won't occur this year and likely not next year, considering the $100 million factoring hurdle. Do you expect to approach that amount or get close to it, without factoring in the effects of the factoring? That's all from me.

Jeremy Smeltser, CFO

Yes, we do have a strong working capital position. In the first nine months, we reduced inventory by $250 million in our continuing operations, and we're very pleased with the efforts of David, Gabriel, and the entire team. Many companies in our industry use factoring and early pay programs, but with rising interest rates, the costs of these programs have exceeded 6%. Therefore, it makes sense for us, given our net cash position, to exit these programs and enhance our earnings. Overall, our cash flow remains very healthy.

David Maura, Chairman and CEO

You need to view this as a capital allocation decision. Some of these facilities have been with the company for decades, and we've had a zero-interest rate environment for the past twelve years. Recently, interest rates have risen significantly. If I can pay off one of these facilities and earn more than 6%, that's a good use of capital, but it's a one-time decision. Personally, if I owned the company, that's the choice I would make, and that's what we are doing.

Chris Carey, Analyst

Okay, thanks a lot.

Jeremy Smeltser, CFO

Thanks, Chris.

Operator, Operator

One moment for our next question, please. And it comes from Ian Zaffino with Oppenheimer.

Ian Zaffino, Analyst

Hi, great, thank you. Thank you very much. Can you give us an update on inflation expectations, how they're tracking versus what you initially told us and then maybe even by division, right, because I would imagine HPC is large freight inflation that's now sort of come down, but you mentioned that there's other some offsets. So maybe you can kind of give us an idea of what's going on, on the inflation side of things.

Jeremy Smeltser, CFO

Yes. I mean, honestly, I think the year is progressing pretty much as we expected it would. The inflation started to wane Q4 last year, and we entered the year with that $55 million or so of excess cost on the balance sheet. As we talked about, that was all flushed in Q1 and Q2, and we saw both gross profit and EBITDA margins expand nicely from Q2 to Q3 sequentially. So as we look forward, the inflation headwinds are actually pretty small, subsiding in some materials, but energy and labor remained high, ocean freight is down. So it's kind of a mixed bag out there. But as we expected. So honestly, as I look forward to F '24, I don't see it being much of a conversation other than the first half year-over-year, we should have a tailwind from not having that excess cost on the balance sheet entering F '24.

Ian Zaffino, Analyst

Okay, thanks. And then on HPC and a potential separation, I mean, do you think if you fix the fundamentals, you could then spin it off? Or do you feel like you need to get more scale, do it JV or any other type of alternatives.

David Maura, Chairman and CEO

I believe we have previously explored partnerships strategically, as there are synergies to be gained. There are numerous companies in this sector with similar cost structures, and it seems inefficient for multiple appliance firms to be selling toasters using the same supply chain and distribution networks. I was hoping we could create something synergistic that would provide greater value to us as equity holders. However, if necessary, the Board has the option to pursue a spin-off, and we have been preparing for that possibility. If it comes to that, we will proceed with it.

Ian Zaffino, Analyst

Okay, thank you very much.

David Maura, Chairman and CEO

But we got to spend something out that's healthy, though, right?

Ian Zaffino, Analyst

Understood. Thanks.

Jeremy Smeltser, CFO

Thank you, Ian.

Operator, Operator

Thank you. One moment please. All right, and our next question comes from the line of Brian McNamara with Canaccord Genuity.

Brian McNamara, Analyst

Hey, good morning, guys. Thanks for taking our question. On destocking, I'm curious how much visibility you guys have into the wholesale channel inventory that as we've heard from several other companies related and unrelated at the worst of destocking is largely behind us. Can you give us a sense of sell-in versus sell-through, particularly across Home & Garden and HPC?

Jeremy Smeltser, CFO

Yes, I think it's reasonable to say that most of the challenges are behind the market. The exception is primarily the U.S. kitchen appliance market, which still has its difficulties. In Home & Garden, there hasn't been a notable change in retail strategy this quarter, but we did observe lower point of sale figures than anticipated, indicating that it will take longer for inventory levels to decrease. As mentioned earlier, we'll provide more insights on the next call regarding the differences between sell-in and sell-out in Home and Garden. The main areas still facing challenges are North American kitchen appliances and to some extent, Home & Garden.

Brian McNamara, Analyst

Thank you.

Operator, Operator

Thank you. One moment please. And it comes from the line of Jim Chartier with Monness, Crespi, Hardt.

Jim Chartier, Analyst

Hi, thanks for taking my question. I just want to follow up on the prior question. What's kind of your POS expectation for each business for this year?

David Maura, Chairman and CEO

In terms of growth?

Jim Chartier, Analyst

Growth or declines, yes. So if you can give us kind of what your expectation for POS for Home & Garden, for Pet and Home & Personal carriers for the year, just so we can have a better idea of what the destocking impact is for the year.

Jeremy Smeltser, CFO

Yes, there is still some season left in Home and Garden, but it is flat to down low single digits for the year. We've observed some areas with high single-digit declines and others with high single-digit increases as the year has progressed. In GPC, particularly in companion animal and consumables, which make up about two-thirds of our business, the situation is slightly better with blended low single-digit growth. However, aquatics has seen a drop of double digits, with environments decreasing by 25%, which is holding us back. I believe much of that is behind us as we enter Q4, and I expect Q4 to perform better than the organic growth we experienced in Q3. In HPC, as mentioned during the call, the overall market appears to have declined by high single digits to low double digits, especially in North America. When we compare ourselves to our peers, we see an organic shrinkage of 10% to 15%, which might be slightly worse than the actual point-of-sale data in those markets, but our visibility into it is limited.

Jim Chartier, Analyst

Great. And then on the exit of certain categories for Global Pet, when did that start to impact sales for the business? And should we expect kind of a similar impact going forward?

Jeremy Smeltser, CFO

It's really in a late Q2 and Q3 set of action items. Like I said earlier, it was about half of the organic shrink, about 3% impact. And it will continue at that rate for probably another two quarters or so. But again, as I said earlier, I still expect sequentially that the organic top line performance will improve.

Jim Chartier, Analyst

Great. Thank you.

Operator, Operator

Thanks. One moment for our next question, please. All right, and it comes from Olivia Tong with Raymond James.

Olivia Tong, Analyst

Hi, thanks, good morning.

Jeremy Smeltser, CFO

Hi, Olivia.

Olivia Tong, Analyst

Hi, great. The environment was pretty tough this year. Some of that is out of your control, the weather, there's only so much one can predict on that. But now that you have the bandwidth, both from a financial and quite frankly, headspace perspective, what's your view on investment levels through here, not only just the pure sales but also to help with forecasting and inventory management as well.

Jeremy Smeltser, CFO

Well, look, we continue to make investments in this company throughout the last couple of years even with where leverage was and uncertainty in the economy. We put in SAP, IVP in our businesses. I think that has contributed to our inventory performance this year. So we're very comfortable there. And I think we've talked about before, we are in the middle of a new greenfield SAP S/4HANA investment that is about to go live from a pilot perspective and then we'll roll out over the coming couple of years. All of those tools will help us in forecasting and understanding what's happening in our business globally in a much quicker and more thoughtful way. And then the reality is we are a consumable consumer business, and we can't always predict what POS is going to happen. So we're always going to have that variable out there as are our peers and competitors.

Olivia Tong, Analyst

Got it. And then obviously, you're in a net cash position right now. You've been very clear over time that your long-term intent is 2 times to 2.5 times on a net basis. So after the debt paydown, share repurchase plan, including the end of the quarter, you still probably have just under $1 billion in proceeds. So how should we be thinking about deploying that into that over the next several years?

David Maura, Chairman and CEO

It really depends on the share price.

Olivia Tong, Analyst

Got it. Thank you.

Operator, Operator

One moment for our next question, please. And it comes from Mike O'Brien with Wolfe Research.

Mike O'Brien, Analyst

Hi, good morning, guys. Thank you for taking my question.

David Maura, Chairman and CEO

Good morning.

Mike O'Brien, Analyst

So the first question I have. So, David, you mentioned that you're not interested in pursuing strategic M&A at the moment. However, when we're looking at the June press release following the HHI close. You guys mentioned strategic M&A as a potential way to deploy capital, so I just want to confirm that you're not looking at M&A right now at least in the near term. And then the second question, I have is regarding your margin. So, you guys obviously have made material improvement on your EBITDA margins, particularly on the pet care business. So when I'm looking at EBITDA guidance for the year, down mid-single digit, keeping up a little conservative given that you guys are making some headway with your margin improvement on the pet care business. Thank you.

David Maura, Chairman and CEO

We have certainly not been conservative enough. And so that's, so I will answer your second question. Your first question is never say never, I learned to never say never in my life. So if something comes along in pet, it's a beautiful asset and sellers' expectations are right, we'll buy it. I'm just telling you today, I've got nothing in my sights. And I think the share price is the best use of our cash.

Operator, Operator

Thank you. And that concludes the Q&A session, I'll turn it back to Faisal Qadir for any final comments.

Faisal Qadir, Vice President of Strategic Finance and Enterprise Reporting

Thank you. With that, we've reached the top of the hour. So, we will conclude our conference call. I thank David and Jeremy and on behalf of Spectrum Brands. Thank you all for your participation.

David Maura, Chairman and CEO

Thanks, everybody. We'll talk to you soon.

Operator, Operator

Thank you all for participating in today's conference. You may now disconnect.