Earnings Call Transcript - SPB Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for joining us, and welcome to the Q1 2020 Spectrum Brands Holdings Incorporated Earnings Conference Call. After the presentation, there will be a question-and-answer session. I would now like to turn the call over to your speaker today, Kevin Kim. Thank you, and please proceed.

Kevin Kim, Divisional VP of Investor Relations

Thank you, Chris. Welcome to Spectrum Brands Holdings' fiscal 2020 Q1 earnings conference call and webcast. I'm Kevin Kim, Divisional VP of Investor Relations and moderator for today's call. To help you follow our comments, we have placed a slide presentation on the events calendar page of 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, Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis, our Chief Operating Officer. After their opening remarks, we will conduct the Q&A session. Our comments today include forward-looking statements, including our outlook for fiscal 2020 and beyond. These statements 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 January 30, 2020, and our most recent SEC filings and Spectrum Brands Holdings most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement. Also, please note, we will discuss certain non-GAAP financial measures on 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. And now, let me turn the call over to David Maura.

David Maura, Chairman and CEO

Hey, good morning. Thanks, Kevin, and good morning, everybody. Thanks for joining us today for our first quarter conference call. As I stated on our last earnings call, fourth quarter of fiscal 2019, we expected to have a dip in our first quarter performance starting in 2020, and then to regain momentum in the balance of the year. In this quarter, we just reported organic sales were essentially flat with our adjusted EBITDA down 11.4%. The first quarter decline in adjusted EBITDA was in line with our expectations as tariffs exceeded the ramp-up of our productivity improvements. We expect to resume sales growth this quarter, and additionally, our Global Productivity Improvement Plan is expected to catch up to our tariff headwinds. On the topline, we experienced organic growth in our Home & Personal Care divisions and in PET, while timing issues in our Home & Garden and HHI segments drove us flat overall. We continue to expect net sales, Adjusted EBITDA, and free cash flow growth in 2020. If I could have you turn to slide seven, we are executing on our strategic plan and delivering full-year revenue growth is a top priority for each of our teams. For example, in our Home & Personal Care division, we had an outstanding quarter. This quarter, our appliance unit reported its first quarterly growth in over a year. We're particularly pleased to see this positive inflection point in our appliance business as it fuels our confidence as a management team that the investments we are making to streamline our businesses, launch new products, invest in innovation, R&D, and marketing are beginning to bear fruit. We experienced top and bottom line growth from Home & Personal Care, demonstrating tremendous progress from the new leadership team there, led by Dave Albert. Additionally, this quarter represents the 5th consecutive quarter of topline growth in our Global Pet Care unit. This was driven by a combination of continued growth in our dog chews and treats category, but more importantly, continued innovation and market share gains. This quarter also represented the third consecutive quarter of bottom line growth for our Global Pet Care business. We continue to make progress on several fronts this quarter. Firstly, we entered into an agreement for the sale of our dog and cat food manufacturing assets in Coevorden, in the Netherlands, for a price of approximately USD33 million. Spectrum will continue to operate the commercial dog and cat food assets with the IAMS and Eukanuba brands in Europe for the time being. However, this action represents progress against our plan in Global Pet Care to exit non-core assets and focus on our core brands. Secondly, we continue to reward shareholders by executing a $125 million accelerated share repurchase program. We repurchased 1.3 million shares of our common stock for approximately $81 million through open market repurchases during the quarter. Thirdly, we made significant progress on our plans to generate over $100 million of run-rate savings from our Global Productivity Improvement Plan over the next 15 to 18 months. Much of these savings will be redirected to reinvest in our base businesses, to drive future growth, as well as offset additional tariff costs that we're experiencing in fiscal 2020. There is much more work to be done this fiscal year as we execute on our productivity improvement plans and embrace a more customer-driven mindset. However, I am confident that our best days are ahead of us again, as we work to deliver significant long-term value creation and produce sustainable growth going forward. Our Spectrum 2020 guiding principles remain a vision we aspire to achieve, focusing on being strong innovators of great products, marketed with excellence and supported by consumer insights. Clarity means we're continuing to simplify our businesses by streamlining our go-to-market strategies and becoming a much more productive and efficient company. Focus represents our relentless pursuit of best-in-class customer service attributes. This is our pathway to a consumer-driven mindset, accepting nothing less than outstanding quality and service while increasing innovation and marketing investments behind our brands. These actions were evidenced in our Home & Personal Care business this quarter. We are driving a culture of greater accountability, much quicker decision-making with an energized leadership team that has been refreshed with new talent, and focused on operational excellence as we position our company for improved sales, earnings, and sustainable free cash flow growth. Now you'll hear more from Jeremy on the financials, and Randy will give you an update and some additional business insights from the different business units. Let me turn the call over to Jeremy.

Jeremy Smeltser, CFO

Thanks, David. Good morning, everyone. If you'll turn to slide nine, I will start with a review of Q1 results from continuing operations, beginning with net sales. Net sales decreased 1%. Excluding the impact of $6.3 million of unfavorable foreign exchange, organic net sales were essentially flat, with growth in HPC and Global Pet Care, offset by declines in Home & Garden and HHI. Gross profit fell 12%. Gross margin of 30.9% decreased 380 basis points as higher tariff costs, timing of capitalized manufacturing variances, and GPIP restructuring costs were partially offset by productivity and positive pricing. SG&A expense of $226.5 million decreased 11.1% to 26% of net sales this year compared to 29% a year ago, driven by higher non-cash depreciation and amortization charges recorded last year in HPC due to the reclass back into continuing operations in the period. The operating loss was driven by the recognition of a loss on the asset sale and impairment charges in Global Pet Care associated with the Coevorden dog and cat food manufacturing operations, and higher GPIP restructuring costs, partially offset by lower depreciation and amortization. Operating income was also negatively impacted this quarter by $8.5 million of higher stock compensation for a more normalized long-term incentive compensation compared to a timing delay last year. This will normalize on an annual basis. Adjusted EBITDA decreased 11.4%. Growth in Global Pet Care and Home & Personal Care was offset by declines in Hardware & Home Improvement and Home & Garden. Adjusted EBITDA margin declined 140 basis points driven primarily by higher tariff costs, timing of capitalized manufacturing variances, and stranded costs, partially offset by productivity and positive pricing. If we turn to slide 10, you can see Q1 interest expense from continuing operations of $34.8 million decreased $22.2 million driven by our lower debt levels. Cash taxes during the quarter of $14.5 million were $4.5 million higher than last year, driven by a tax audit settlement that was paid in the quarter. Depreciation and amortization from continuing operations of $41.7 million decreased from $66 million last year, primarily due to the impact of HPC depreciation and amortization in the prior year that I mentioned earlier. Separately, share-based compensation increased from $6 million last year to $15 million this year. Again, as I mentioned earlier, this will normalize on a full-year basis. Cash payments for transaction-related charges were $4.6 million, down from $20 million last year. Restructuring and related charges for Q1, GPIP and including discontinued operations were $38.6 million versus $9.9 million last year. The higher cash spend was driven solely by GPIP. Moving to the balance sheet, we completed Q1 in a strong liquidity position, including $678 million available on our $800 million cash flow revolver and a cash balance of $142 million. Debt outstanding was $2.4 billion, down 50% from $4.8 billion at the same time last year. As compared to the prior year quarter, first quarter ending inventory was lower by $95 million, and our operating teams continue to drive more disciplined and improved processes into our working capital management enabled by our continued investments in capacity and automation. In addition, in January this year, we paid the previously disclosed payment to Energizer in connection with the divestiture of the VARTA business. In addition, we continue to hold 5.3 million shares in Energizer currently valued at approximately $250 million. Capex in the quarter was $18.7 million versus $13.5 million last year. Turning to slide 11 now and our 2020 guidance. We are reaffirming our 2020 guidance for net sales, adjusted EBITDA, and adjusted free cash flow. We still expect low single-digit reported net sales growth, with foreign exchange expected to have a slightly negative impact based on current rates. Adjusted EBITDA is still expected to be between $570 million and $590 million. This guidance includes GPIP benefits and the impact of tariffs that are currently in place. Fiscal 2020 adjusted free cash flow from continuing operations is still expected to be between $240 million and $260 million. Depreciation and amortization is expected to be between $145 million and $150 million, excluding stock-based compensation of approximately $55 million to $60 million, relatively consistent with last year. Full-year interest expense is expected to be between $140 million and $150 million, including approximately $10 million of non-cash items. Cash interest payments are expected to be between $130 million and $140 million. Restructuring and transaction-related cash spending is expected to be between $90 million and $100 million. Capex is also expected to be in the $90 million to $100 million range. Cash taxes are still expected to be between $45 million and $55 million, and we do not anticipate being a significant US Federal cash taxpayer during fiscal 2020, as we continue to use net operating loss carry-forwards. We started this year with approximately $800 million of usable federal NOLs. And for adjusted EPS, we continue to use a tax rate of 25%, including state taxes. Now I'll turn it over to Randy for a more detailed look at our business unit performance.

Randy Lewis, COO

Thanks, Jeremy. Good morning, everyone, and thank you all for joining us today. At this point, I'll walk through the results of each of our business units. So turning to slide 13 and hardware and home improvement. First quarter reported net sales, organic sales decreased 2.4% and 2.5%, respectively. The lower net sales were driven by residential security and builder's hardware categories, partially offset by growth in a plumbing category. The decline in residential security was driven by lower builder volume, and builder's hardware was driven by timing of orders from two large customers. Adjusted EBITDA decreased 23% driven by incremental tariff costs and lower manufacturing volumes in the quarter, partially offset by higher pricing and lower distribution expenses. We remain excited about the outlook in this category, the electronic deadbolt and smart locks in 2020, given the relatively low but fast-growing US residential adoption rates. As an example of this, earlier this month, the Kwikset team introduced the Halo Touch WiFi Smart Lock at the Consumer Electronics Show in Las Vegas, further innovating the Halo smart locks by providing homeowners access to their homes via fingerprint. This is the first in the industry to have this technology. We are very pleased with this innovation, which was given a best Home Tech Product Award by several different outlets. In this space, we continue to use our proprietary cloud-based platform and new mobile application as a competitive advantage for launching new product introductions. Additionally, our strategy in the plumbing segment is expected to deliver significant new wins in this segment, and we look forward to updating you on that in our next quarter call. We believe our long-term growth will be driven by a robust electronics product roadmap and the new introductions our teams are bringing to market this year. Now to Home & Personal Care, which is slide 14. We are very happy to report that the first quarter reported net sales increased 1.5%. Organic net sales grew a solid 3.2%, and adjusted EBITDA grew 4%. Net sales were driven by growth in Europe in both Personal Care and Small Appliances, and net sales in the US declined slightly compared to the prior year, driven by the performance in department stores and specialty channels. As David alluded to earlier, these results demonstrate remarkable progress in our road to recovery with the new appliance leadership team rebalancing its cost structure with the objective of accelerating profitable growth for our trusted brands through compelling and innovative products. Our consumer-driven mindset in Europe continues to pay dividends with top line growth. For example, over the last year, strong growth from new product innovation in Remington men's grooming has far outpaced category growth rates. Additionally, Russell Hobbs has achieved significant share gains, especially in the UK home market. There's much more to come in the appliance category, and we believe this renewed focus on supporting our strategic brands and investing behind fewer, bigger, better products will lead to continued growth in 2020 and beyond. Moving to Global Pet Care, which is slide 15. First quarter reported net sales increased 0.5%, and adjusted EBITDA increased by 8.2%. Excluding currency, sales grew 1.1% in the quarter. Higher net sales were attributed to continued growth in the US companion animal segment as we overcome a decline in the US aquatics. In Europe, sales grew both in aquatics and companion animal segments. We experienced continued growth in the companion animal sales in Q1 in the US despite lapping a double-digit increase in the market from the prior year. Our pet team remains committed to exiting non-core assets and activities to invest more time and resources into our targeted top growth rates. As David highlighted earlier, we demonstrated this commitment by exiting our rawhide manufacturing facilities in Latin America and agreeing to exit our Coevorden dog and cat food operations in the Netherlands. Given positive category growth projections for increasing participation rates and passionate pet owners, we continue to be pleased with our innovative product roadmap and strategy for growth in the Pet business. During the holiday season, SmartBones was listed as a top seller award winner by our largest online retailer, and dog chews and treats growth in Canada and Latin America have benefited from new listings for our Good'n'Fun brands and SmartBones brands at several major retailers. We are also encouraged by our continued partnership development in the US pet specialty channel for multiple new product listings are expected to start shipping later this year. Turning to Home & Garden, which is slide 16. First quarter reported net sales decreased 13.9%, and adjusted EBITDA decreased by $6.4 million. While Q1 revenue and EBITDA were below the prior year, keep in mind that Q1 represents the smallest quarter of the year. Sales were impacted by higher than normal inventories at customers as a result of unfavorable weather in 2019. However, as we exit the quarter, we believe our customers have a much improved inventory position as point of sale is very positive since the beginning of Q2. In the quarter, business in Home & Garden was also impacted by the timing of manufacturing costs due to a later seasonal inventory build, as well as higher advertising investments as we committed to. In the last 12 months, we continue to grow market share in all three business segments of Home & Garden: repellents, household insecticides, and outdoor controls. Going forward, we continue to be encouraged by our seasonal planning with our retail customers, our consumer promotion plans, and weather outlook for this spring. We are confident that our solid brand equities and investment in product development and marketing will drive growth. Turning to slide 17, we also want to provide an update on our Global Productivity Improvement Plan. This program continues to be our most important strategic initiative for delivering sustainable organic growth. As we focus on quicker and more globally aligned decision-making within each of our businesses, driving more focused and relevant product innovations, enhancing consumer analytics, and R&D processes. Since our last call, we have successfully closed Latin American rawhide facilities and Global Pet Care, and in late November entered into the sale agreement we discussed about the Coevorden dog and cat food manufacturing operations. We have continued to lock in significant savings from new center-led sourcing processes. We continue to expect annualized gross savings from various workstreams of GPIP to deliver at least $100 million annually, and these savings will be at full run-rate in the next 15 to 18 months. Much of the savings will be reinvested back into growth initiatives and consumer insights, R&D, and marketing across each of the businesses. One of the most exciting developments in the quarter was the launching of our center-led commercial operations team. The formation of this team will enable a centralized approach to consumer insights, digital asset development, e-commerce operation, and revenue and profit management for each of the business units to marry their individual brand, product, and channel strategies. This group is being led by one of our strongest internal leaders and it will be a major step forward in how we efficiently harvest annualized data to drive long-term organic growth. We look forward to continuing to provide more updates and details on our very exciting GPIP benefits on our future calls. Now back to David.

David Maura, Chairman and CEO

Thanks so much, Randy. Thanks, Randy. Thanks, Jeremy, Kevin. Thanks, everybody, for joining us this morning on the call. With our first quarter behind us, we're pleased to begin realizing additional benefits from the Global Productivity Improvement programs, which Randy described in detail, and to be returning our company to growth in the second quarter and for the balance of this fiscal year. I'd like to thank all of our teams for their progress in revitalizing our company and driving change for our future success. We have a strong balance sheet and healthy liquidity, and we are now setting our sights on accelerated growth. We also continue to believe that our share price is materially undervalued, and we will repurchase our stock opportunistically from time to time. My team and I are proud that we were able to deliver on our financial commitments for 2019, which has only strengthened our resolve to deliver on our 2020 financial guidance of low single-digit sales growth, adjusted EBITDA of $570 million to $590 million, and adjusted free cash flow of $240 million to $260 million. Going forward, we expect to drive material further growth in our free cash flow generation from there. Now I will turn it back to Kevin to take any of your questions.

Kevin Kim, Divisional VP of Investor Relations

Thanks, David. Chris, let's just jump right into Q&A.

Operator, Operator

And our first question comes from Bob Labick with CJS Securities. Your line is now open.

Bob Labick, Analyst

Good morning. Thank you for addressing my questions. In previous calls, we touched on how part of your growth and anticipated reacceleration in growth was fueled by consumer-focused new products. Could you elaborate on the pipeline of new products and the capabilities and processes for new product introductions now compared to a year or two ago, and what the future looks like for that?

David Maura, Chairman and CEO

Yeah, I'll let Randy handle that.

Randy Lewis, COO

Yeah, good morning, Bob. So that's a major component of our GPIP. We talk about GPIP, when we talk a lot about it being kind of savings front-loaded. But really behind the scenes, the heavy lifting is redesigning that innovation process, and we are working with some world-class experts to help guide us through that. It starts with this commercial operations team that I discussed in the prepared remarks, where we aim to centralize all of the generalized functions of scraping and harvesting data about what's happening within categories, both macro and micro, internal and external, and feeding that back into a disciplined innovation process within each of the businesses, aligned with the brand strategies, channels, and products. These new product development processes are embedded in each of the business units and tend to be at a little different stages of development. But as an example, HHI being first to market with a fingerprint WiFi lock is just the tip of the iceberg when it comes to launching an entire line of products in that space. When we look at our appliance business, we are very pleased with the progress we've made there over the last year and it has not been short-term minded. From the very beginning, David was committed to revamping that business with a focus for growth, and we could have turned around bottom-line numbers much quicker if we weren't committed to the long-term. We've got a great NPI engine and are doing a lot to concentrate that on fewer, better, stronger products. We've got a number of new and exciting products coming out in that space within the next couple of quarters. We'll be launching a George Foreman smokeless contact grill in the US that will start shipping later this quarter and exciting new products in Remington Wet Style, Black & Decker, Air Fry Toaster Ovens, etc. So that's evidence there. A little bit longer timeline in Home & Garden, but you'll start seeing products that we'll be launching out of that process later this year.

Bob Labick, Analyst

Yeah, absolutely, that's great color. I really appreciate that. And then, I don't know if it’s in the earnings slide deck today, I don’t think so, but in recent slide decks you've discussed that 15 of your brands make up about 80% of your sales. You've also talked about divesting non-core businesses. Can you talk a little bit about the portfolio optimization process? Are there going to be other small sales like the European divestiture of dog and cat food mentioned today, or where does that stand?

David Maura, Chairman and CEO

Yeah, look, I think we've been pretty open about it. We want to feed the winners and starve the losers. Most of the streamlining is done. I mean, quite frankly, our global footprint in Pet has probably reduced from 10 facilities down to 4 and will be growing our sales pretty nicely, resuming strong growth in Pet for the second quarter. So again, everything is about productivity and getting greater yields. The design is what I'm really excited about; everything here is built on getting data to ensure that as we allocate capital internally, we’re doing it much more efficiently and obtaining a higher return on those dollars. So, yes, there is no question, things like Coevorden are a little disruptive and they cause some noise in the quarter, but we're still not done; we are down to little pieces of it. Most of the teams have already jumped on board with the whole mantra of vision, clarity, focus, and I think everybody knows what they stand for and where they're going.

Randy Lewis, COO

No, I think that's exactly right. As we've transitioned from a strategy that previously led to a lack of global prioritization, we have focused very heavily on realigning the businesses on global brand strategies. Bob, there aren't a lot of large assets we're discussing, but we have dozens of smaller brands and product categories that have emerged globally and they have simply become distracting on resources. A lot of effort is going into making sure we're concentrating within each of our businesses on those strategic brands; those brands will get the investment, they'll receive the NPI attention, and they'll be the ones getting the reach to the top talent—this is where much of the growth will come from.

Operator, Operator

Thank you. And our next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.

Ian Zaffino, Analyst

Okay, great. Thank you very much. Just kind of keying in on your comments about the return to growth in the second quarter. What in particular is driving that? What are you particularly excited about? Could you give us a little more color on that?

Jeremy Smeltser, CFO

So growth in the second quarter, I mean, I think, as we talked about in appliances, we expect that growth to continue. As we mentioned on our fourth quarter and guidance call, we expected growth in all four businesses, both top line and EBITDA. I think Randy has talked about new products coming down the pipeline, which will help accelerate that growth from first quarter on through the rest of the year. Specifically in Q2, some of the challenges we had around the seasonal side of the Home & Garden business, we expect to improve sequentially.

David Maura, Chairman and CEO

Go ahead.

Randy Lewis, COO

I was just going to add a bit of color for the team regarding the Home & Garden business for the season. While we are bullish about this year, we’ve noticed a heightened strategic focus on the category from some of our top retailers, which is exciting to us. However, the timing is going to be different; many retailers loaded upfront last year and so the pacing of revenue in that business this year is going to be a little more back-end loaded than in the past. But overall, Jeremy is right; it's the timing of new product introductions in each of the businesses that is affecting growth.

Ian Zaffino, Analyst

Okay. And then just one other question on the tariff side. What should we expect for the remainder of the year? Can you explain what the impact is given all the moving parts?

David Maura, Chairman and CEO

Look, I think we've disclosed in the past the headwinds we are facing. Obviously, Phase 1 has been expected to be massively beneficial, but I would tell you it’s been slightly beneficial. My main takeaway on Phase 1 is that, to some extent, we are not getting hit in the face anymore. We will pick up a little bit of incremental benefit, but it’s immaterial. The best thing I think that's occurred is that there is clarity and certainty in the marketplace, where our retail customers have resumed a more normal trading pattern, which also fuels our confidence in Q2 growth.

Operator, Operator

Thank you. And our next question comes from the line of Olivia Tong with Bank of America. Your line is now open.

Olivia Tong, Analyst

Great. Thanks. Good morning. I wanted to talk a little bit more about sales because you guys have been pretty explicit about EBITDA expectations to start the year, but sales were quite a bit lower than what the market was expecting. So, relative to your expectations, what didn't go as expected? And then just on specifically on HHI for a minute. That was particularly surprising given the strength in housing data, both new and remodels, etc. You mentioned a few things on the timing. Did those orders that you expected in the December quarter now come through?

Jeremy Smeltser, CFO

Yeah, good morning, Olivia. So regarding the quarter, we talked about Home & Garden being a little bit of timing. Several large retailers took a more measured approach to the feed-in, leading to some shipments we might have expected at the end of December coming in Q2.

Olivia Tong, Analyst

Got it. If I can just ask specifically on residential locksets, because that's obviously a business where you alluded to quite a bit of innovation and obviously the tailwinds. So it’s a business that you lost here. I would assume it’s lower margin relative to HHI average?

David Maura, Chairman and CEO

Yes. It was lower margin and was older technology, which we weren’t willing to chase in terms of pricing, and it was related to previous challenges we faced in supply chain execution.

Olivia Tong, Analyst

Got it. And then if I could just follow up on market share positions across the portfolio because HPC seems to be stabilizing but HHI has some losses; H&G, at least you underperformed your closest competitors. So could you discuss what’s going to drive improvements, especially given your comments about retailer excitement but also pushing out orders, which seems a bit at odds with each other?

David Maura, Chairman and CEO

If you're comparing our Home & Garden business to a large competitor, there is a big gap in the lineup there. We don't compete in many of the categories, and the trend lines tend to diverge. As we look at the categories we compete in, our data shows we're taking share, especially at home centers. The timing of orders is not overly concerning, as long as the inventory is available and we have the necessary capabilities. Last year, we were able to meet expectations when our retailers accelerated purchases. So, though there are delays now, I’m still confident about that.

Operator, Operator

Thank you. And our next question comes from the line of Faiza Alwy with Deutsche Bank. Your line is now open.

Faiza Alwy, Analyst

Hi, good morning. So a couple of questions from me. Just first on HHI, I wanted to go back on the timing of orders; I don’t think you quantified the impact from that. I would love to hear how much the impact was just on the timing of orders on the builders' hardware piece? And then I know that builders' hardware is where you might be competitively disadvantaged due to tariffs because you had consolidated your manufacturing in China. I wonder if there's been some impact from that; do you see a pricing component there? Are you seeing any volume impact from that pricing?

David Maura, Chairman and CEO

On builders' hardware, specifically, we are taking material actions internally to get more efficient to lower our cost structure and materially improve our profitability in the current fiscal year. We're expecting growth in Q2 and a very good finish for hardware for the balance of the year. I think the Home & Garden piece revenue was around $46 million. While we live in a short-term world, every other quarter in Home & Garden is typically $150–$200 million.

Faiza Alwy, Analyst

No, I completely agree; I think Home & Garden is pretty irrelevant for this quarter. I was more concerned about HHI and the builders' hardware piece. But I also wanted to get more color on the Pet segment because you’ve done well on the treat side of that business. However, comps do get a lot tougher. How are you urging growth for that segment for the remainder of the year? And I just want to understand the mechanics of the sale of these facilities.

Randy Lewis, COO

With regards to the Pet facility, we are working with a synergistic partner who will take over the operations. This partner operates multiple facilities in Europe and has a deep understanding of how to run efficiently. They bring capacity to an underutilized facility which enhances absorption and allows us to focus on the commercial aspects of brand management. With regards to future comps in Pet, we feel good about it because of the pipelining process. The work we did 18 months ago is really starting to pay off. Stronger relationships with US pet specialty are significant for us. And, innovation in aquatics is driving excitement in stagnant sectors; later this quarter, we'll launch the world’s first ever Glo Betta, which adds excitement to that category.

Operator, Operator

Thank you. And our next question comes from the line of Jim Chartier with Monness, Crespi, Hardt. Your line is now open.

Jim Chartier, Analyst

Just wanted to talk about some of the marketing investments you guys have made over the last 18 months. Any color you can provide on what kind of returns you’re seeing? Are you seeing a lift in the products you’ve invested in? Specifically on Manchester United, is that partnership fully activated and what are you seeing there?

Randy Lewis, COO

We won't go into detail about the ROIs on brand investments. However, we are measuring the ramp-up of these investments to be more focused and aligned with our strategies. Regarding Manchester United, yes, fully executed, and there have been really positive impacts from that relationship. I can confirm Remington has grown in Europe this last quarter as evidence.

Jim Chartier, Analyst

Great. And then on the smart locks, you’ve highlighted your in-house cloud platform. Do your competitors have in-house platforms? What kind of advantages do you offer with your platform versus the rest of the industry?

Randy Lewis, COO

We believe our platform is unique among major providers. One important factor is that our in-house cloud greatly enhances security and operational efficiency, enabling faster consumer experiences and avoiding additional dependencies on home hub networks.

David Maura, Chairman and CEO

I believe we grew 9% in Remington in Europe, based on fully loaded Manchester United programs. I want to emphasize that while we don’t disclose specific ROIs, our teams are still focused on doing what is right for long-term growth. Even with headwinds such as those in Home & Garden where the top line is down, we keep investing in advertising and our brand growth.

Operator, Operator

Thank you. And our next question comes from the line of William Reuter with Bank of America. Your line is now open.

William Reuter, Analyst

Good morning. I know most of the tariffs for you guys were list 3 issues, but given that list 4 has been pushed off and eliminated, is the $80 million to $85 million of incremental tariffs still the right number or should it be lower than that?

David Maura, Chairman and CEO

I think you still have a good ballpark; we probably have a couple of million dollars less, perhaps in the $2 million to $3 million range. That is what I’d like to disclose at this time.

William Reuter, Analyst

Okay. And then in terms of price increases you implemented this year, do you have a sense of what percentage of that $80 million to $85 million you may have pushed through in price at this point?

Jeremy Smeltser, CFO

Yes, I won’t conceal specifics, but we managed to push through well over 50% of those tariff costs via pricing, depending on business, category, and channel.

William Reuter, Analyst

That’s useful. And lastly, when you last updated us, your leverage target was 3.5 times. Given the rapid share repurchases, you guys are a bit above that right now. Do you continue to have that as your target? How should we think about that regarding share repurchases going forward?

David Maura, Chairman and CEO

You should think about 3.5 to 4 times leverage as where I want to steer the ship. The company is materially undervalued at the moment. I am comfortable taking leverage above that for a short period because we're running the business for the long term, steering toward a $7 per share free cash flow business in 2021. With shares trading at these multiples, we're going to buy stock.

Operator, Operator

Thank you. And just a follow-on on the tariffs; you’ve discussed mitigation in the back half of the year. How much of that is moving the sourcing to pro forma by year-end? Where do you expect to be in terms of the percentage of goods sourced from China?

David Maura, Chairman and CEO

I think our appliance unit will remain sourced out of Asia, specifically China, but we are making some changes to our footprints in other parts of the business to become less reliant on China and push things into neighboring countries. I don’t want to divulge specifics on that yet, but we are continuing to reposition our supply chain to benefit the company. More importantly, we want to communicate that the dip in Q1 was anticipated from Q4, and we expect productivity to offset that in Q2, leading to material growth moving forward.

Operator, Operator

Thank you. And just one more on, you talked about a couple of plants potentially closing and one potential sale. Are there opportunities here, and on the flip side, are any of these additional CapEx needs related to plant investment beyond the guidance you provided for this year? Are you in a good spot after completing the first process you announced?

David Maura, Chairman and CEO

We are in a good position, but I will defer to Randy.

Randy Lewis, COO

To clarify, we had four manufacturing locations throughout Latin America that produced dog chews and treats. Those are the four that we announced to have closed recently, and the facility in the Netherlands will be divested. While there may be further changes in the future, there won’t be significant ones. We are in a good spot with our manufacturing footprint and we will continue to maintain a run rate, maybe less in total CapEx to drive efficiencies in automation.

Operator, Operator

Thank you. And our last question comes from the line of Karru Martinson with Jefferies. Your line is now open.

Karru Martinson, Analyst

Good morning. Just on the Chinese virus that's in the headlines, is that affecting any of your production capabilities and what’s the impact there?

David Maura, Chairman and CEO

We’re definitely taking fewer flights to the mainland; our contract manufacturers are there. Potentially, we could see a week's delay on some shipments into the LA ports. However, we do not anticipate any material interruptions.

Karru Martinson, Analyst

Okay. And when you look at your stock price versus potential acquisitions, do you feel you have the right footprint or are there other bolt-ons you would like to add? Or is it simply that your stock price is too compelling?

David Maura, Chairman and CEO

I can't find anything to buy cheaper than my own stock.

Karru Martinson, Analyst

Okay. And just a clarification: When does the Glo Betta come out? My son is in the market after a friend’s fish died.

Randy Lewis, COO

Karru, you should be looking at US Fed specialty later in March; we’d be glad to send you an invitation.

Kevin Kim, Divisional VP of Investor Relations

Great. Thank you, David, Jeremy, and Randy on behalf of Spectrum Brands. Thank you for your participation.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.