Archives July 2020

L’Oréal S.A. (LRLCF) CEO Jean-Paul Agon on Q2 2020 Results – Earnings Call Transcript


L’Oréal S.A. (OTCPK:LRLCF) Q2 2020 Earnings Conference Call July 31, 2020 5:00 AM ET

Company Participants

Francoise Lauvin – Head, Investor Relations

Jean-Paul Agon – Chairman and CEO

Christophe Babule – CFO

Mark Prestwich – Group General Manager, Financial Communication and Strategic Perspective

Conference Call Participants

Celine Pannuti – JPMorgan

Guillaume Delmas – UBS

Richard Taylor – Morgan Stanley

Marion Boucheron – MainFirst

Fulvio Cazzol – Berenberg

Iain Simpson – Barclays

Jeremy Fialko – HSBC

Chris Pitcher – Redburn

Operator

Hello and welcome to the L’Oréal Half Year Results. My name is Molly, and I’ll be your coordinator for today’s event. Please note that this call is being recorded. On participation of the calls your lines will be on listen-only. [Operator Instructions]

I would now like to hand you over to Francoise Lauvin, Head of Investor Relations to begin today’s conference. Thank you.

Francoise Lauvin

Thank you, Molly. Ladies and gentlemen, good morning, [foreign language] and welcome to this conference call for the release of L’Oréal’s half year 2020 figures. Let me briefly introduce the participants to the call and the agenda. We are together today with Chairman and CEO, Jean-Paul Agon.

Jean-Paul Agon

Good morning.

Francoise Lauvin

Chief Financial Officer, Christophe Babule.

Christophe Babule

Hello. Good morning.

Francoise Lauvin

And Mark Prestwich, Group General Manager, Financial Communication and Strategic Perspective.

Mark Prestwich

Good morning.

Francoise Lauvin

To start our discussion today, Christophe Babule will present the financial highlights of the past semester. After this financial review, Jean-Paul Agon will cover the main developments of our business and share with you his views and strategic perspectives. After these presentations, you will be able to raise your questions. We expect to finish this call at around 10:15.

The press release as well as the slides shown this morning are available on our website, loreal-finance.com and L’Oréal Finance app. A replay of the call will be available later today on the same website and app. The French and English versions of the half year financial report will be available in the course of next week. I wish you a good conference.

Let me now hand over to Christophe for the review of the financial highlights.

Christophe Babule

Thank you, Francoise. Ladies and gentlemen, good morning. The presentation of L’Oréal’s first half 2020 financial results will include information about sales, profits, cash flow and balance sheet.

Consolidated sales amounted to EUR 13.1 billion, down 11.7%, both like-for-like and reported and 11.4% at constant exchange rates. The change in the scope of consolidation is positive at plus 0.3%. It is mainly due to the acquisition of the Mugler brand and of Azzaro perfumes at the end of March, partly offset by the disposal of the Roger & Gallet brand.

The currency impact was slightly negative at minus 0.3%. Note that extrapolating the recent exchange rate of July 22nd or EUR 1 at $1.16 until year-end, will have a negative impact on full year sales of around minus 2.2%.

Exchange rates. On this table, the Group’s main invoicing currencies. Over the first half, the dollar appreciated by 2.6% and the yen was up 4.3%. The pound sterling and the Canadian dollar were stable. The Chinese yuan edged down 1.1%. The Russian ruble dipped 3.4%, and the Brazilian real dropped 18.9%.

Sales by division. The spread from East to West of the COVID-19 pandemic led to the compulsory closing of a very large number of retail outlets and almost all of the hairdressing salons around the world for a few weeks. In this extraordinary context, our divisions had a contracted performance.

At the end of June, on a like-for-like basis, the Professional Products Division sales were down 21.3% and those of L’Oréal Luxe declined by 16.8%. The Consumer Product Division sales decreased by 9.5%, but Active Cosmetics grew a very dynamic 9%. Note that every division started the year with a very strong January. April marked the low point from which business recovered progressively month-after-month.

Sales by region. All regions felt the impact of the sanitary crisis. Western Europe declined by 16.1%. France, Germany and the Northern countries resisted well, whereas Italy and Spain were more strongly impacted. North America was down 15.2%. And in the New Markets, Asia Pacific showed good resilience at minus 3.9%, thanks, in particular, to Mainland China growing by a strong 17.5%. Eastern Europe and Latin America are at minus 12.1% and minus 13.9%, respectively. And Africa/Middle East is at minus 17.4%.

Now here is the breakdown of H1 2020 sales by region. Asia-Pacific strengthened its position as the Group’s leading geographic zone, with 34.2% of total sales up 3 points versus its weight in the first half of 2019. The weight of the other region is broadly unchanged as compared with the first half of last year or the full year. This is true for Western Europe, which represents 27.2% and North America at 25.3%. The weight of Latin America at 5% of total sales has slightly diminished and that of Eastern Europe and Africa/Middle East to a lesser extent.

By category, sales are also contrasted. First, note that skincare, our leading category, which accounts for over 40% of the total, posted growth of 1.1%. The perfume and makeup categories were the most impacted by the closing of stores, both at around minus 28%. Haircare comes at minus 10.5%. The closing of salons penalized the Professional Products Division, in particular. Haircare also declined in the Consumer Product Division, but to a lesser extent. And finally, hair coloring at minus 3% was also heavily impacted by the closing of salons, whereas at-home hair coloring was up double digit for the Consumer Product Division.

Let’s move to the profit and loss account. Gross profit amounted to EUR 9.5 billion, representing 73.1% of sales, a level unchanged from that of the first half and the full year 2019. Changes in the scope of consolidation were negative by 20 basis points and currency impact, both conversion and transactions, were positive by 45 basis points. Therefore, on a comparable basis, the gross margin was 25 basis points below that of the first half of 2019 due to lower production in units and upward pressure on transportation and distribution costs. Research and innovation costs decreased by 1%, but increased by 40 basis points to 3.5% of sales.

Advertising and promotional costs increased by 30 basis points to 30.5% of sales. We have continued to reinforce our growth drivers to support our brands, especially in China, with agility to maintain the closest possible bond with our consumers. Digitalization is continuing at full speed as digital media now represents nearly 60% of total media versus 47% in the first half of last year.

Selling, general and administrative costs were 8% lower in absolute value, illustrating the rapid implementation of significant savings as soon as February, such as the head count freeze at Group level and the international travel ban. SG&A increased 80 basis points to 21.1% of sales. Overall, operating profit amounted to EUR 2.357 billion and declined by 150 basis points to 18% of sales as compared with the first half of last year.

Profitability by division. At this stage, every year, we point out that the L’Oréal Group is managed on an annual basis and the half year division’s profitability cannot, therefore, be extrapolated for the full year. I shall, therefore, limit my comments on the following. In the first half of 2020, the profitability of the Professional Product Division has changed from 19.1% to 10.4%. The profitability of Consumer Product Division improved by 60 basis points to 21.3%. L’Oréal Luxe posted a profitability of 20.4% compared with 23.8% in H1 ’19. And that of the Active Cosmetics Division posted a further strong improvement to reach the high level of 28.9%.

Non-allocated expenses, consisting mainly of corporate and fundamental research costs, were stable at minus 2.7% of sales. For the Group as a whole, in the first half of 2020, profitability remains at the high level of 18%.

From operating profit to net profit, excluding nonrecurring items. The net financial result was negative by EUR 36 million. For the full year 2020, net financial expenses of around EUR 80 million can be anticipated, all other things being equal.

Sanofi dividends amounted to EUR 372 million. Income tax amounted to EUR 547 million, representing a tax rate of 20.3%, below the rate of the first half of 2019, which was 23.2% because of a decrease in the profit before tax and, to a lesser extent, a reduction of tax in France. For the full year 2020, we can anticipate a rate slightly below 25%, all other things being equal.

Net profit, excluding nonrecurring items, amounted to EUR 2.144 billion, and the corresponding earnings per share came out at EUR 3.82, showing a limited decline of 12.7%. To help you in estimating your EPS number for the full year, I will recommend that you base your calculation on a diluted number of shares of 561.5 million shares.

We’ll now complete the review of the profit and loss account. Non-recurring items amounted to a negative EUR 322 million in the first half of 2020, net of tax, of which EUR 407 million of other income and expenses principally made of, first, the depreciation of the goodwill and of the brand Clarisonic for an amount of EUR 90 million.

Second, restructuring charges of EUR 133 million related to the continued reorganization of the distribution of the brand NYX Professional Makeup, the ongoing reorganizations in Western Europe, the repositioning of Decleor and Carita brands and the termination of the Clarisonic brand.

And third, costs generated by the sanitary crisis for EUR 140 million, including health protection measures for employees and expenses derived from the decisions made by the different government authorities to impose a sudden and total closing of some of our businesses due to lockdown measures over a defined period of time. After taking into account the nonrecurring items, net profit after non-controlling interests came out at EUR 1.822 billion.

Cash flow. Gross cash flow amounted to EUR 2.6 billion, with a change in line with that of the net profit. The change in working capital increased significantly, which happens every year in the first half. CapEx at EUR 504 million represented 3.8% of sales. And for the full year, this will reach around 4% of sales. Net operating cash flow was EUR 1.274 billion.

Lastly, after payment of the acquisitions, the residual cash flow amounted to minus EUR 290 million. Note that as the AGM was postponed to 13th of June, the dividend of EUR 3.85 per share, a level unchanged versus that of the prior year, was paid early July.

Balance sheet. The balance sheet remains particularly solid with shareholders’ equity to the tune of EUR 29 billion. And last, the financial situation remains very robust. Net cash amounted to EUR 2.1 billion and to EUR 4 billion, excluding the financial lease debt.

Thank you very much for your attention.

Jean-Paul Agon

Thank you, Christophe. As you have seen, L’Oréal has demonstrated a pretty good resilience and solidity through the crisis. First and foremost, our absolute priority has been to protect our employees, and we have taken every possible measure to ensure the safety. So far, we have had a very limited number of cases and we have guaranteed the jobs and salaries of all our employees.

Secondly, we have been supporting caregivers in every way possible with the donation of more than 15 million units of hydro-alcoholic gels and hand care products to health care professionals, clients, suppliers and NGOs in more than 40 countries, mobilizing more than 70% of our factories in the process. And lastly, we have supported our most fragile partners, freezing receivables from more than 100,000 small clients in perfumeries and shortening the lead time of payments to 9,000 most vulnerable suppliers.

Secondly, the beauty market has been quite resilient. We estimate that the beauty market declined between minus 13% and minus 14% over the first semester. This COVID-19 crisis has been a crisis of supply rather than demand. The lockdowns around the world closed millions of salons, perfumeries, department stores, airport stores, et cetera, making consumers unable to buy product and services. The impact has been very contrasted by sector and channel. The professional sector was the most heavily affected with salons totally closed at the beginning of the second quarter.

Luxury was also severely impacted by the closure of most perfumeries, department stores and airport stores. The market was less negative in the mask and dermocosmetics sectors where stores remained open.

By channel, we have seen a fantastic acceleration in e-commerce with millions of consumers or tens of millions or hundreds of millions of consumers, discovering this channel for the first time. And e-commerce remains strong, even when brick-and-mortar stores reopen.

At the other extreme, the travel retail channel experienced a brutal drop in the number of international travelers. The impact was also very contrasted by category, that’s for the market. Makeup and fragrances were heavily impacted due to mask wearing and consumer confinement. Skincare has resisted better. And haircare was less impacted, but still negative over the semester.

By zone, the crisis has hit all regions. Western Europe was the most severely impacted one. We see positive signs of recovery in northern countries like Germany, the Netherlands and the Nordics, where lockdowns have been less severe and e-commerce is well developed. And France is coming back. The U.K., Spain and Italy have been more heavily affected.

In North America, the U.S. remains very challenging with the sanitary situation and lockdowns varying from state to state. In the New Markets, the semester was very contrasted with some countries like India and Brazil heavily impacted and others recovering more quickly, of course, China.

In China, especially, the market rebounded very quickly and was back to double-digit growth in Q2, confirming consumers’ strong appetite for beauty. In China, beauty is leading the recovery and growing much faster than total retail sales. Online growth remains very strong, and off-line traffic is returning to normal progressively.

L’Oréal’s activity has shown great resilience during this crisis. Globally, we have been able, once again, to outperform the market. Three divisions outperformed: Active Cosmetics, Professional Products and L’Oréal Luxe. The Consumer Product Division was in line with the market in sell-out.

The crisis began in February and reached the low point in April. Since then, as you see on the slide, the group’s activity has recovered month after month and is progressively returning to growth. July, that we are closing today, will be the first positive month in terms of growth again since January.

After a very promising start to the year, the Professional Product Division has been resilient despite the complete closure of salon and rebounded as lockdowns were lifted. The division has outperformed the market in all zones. Its e-commerce business grew very fast by plus 80%, confirming the success of its new multichannel strategy. Kérastase is leading the category and the recovery. Support for hairdressers during this crisis has strengthened the division’s very strong relationship and its leadership position in the industry.

L’Oréal Luxe performed significantly better but a very negative market, gaining share in all 3 categories: skincare, makeup and fragrance. The main drivers for the divisions where its acceleration in e-commerce, the rebound of consumption in China where the division grew by more than 30% in Q2, and finally, the strong outperformance in skincare, thanks to Lancôme, Kiehl’s and Helena Rubinstein, in particular.

For the Consumer Product Division, sell-out was in line with the market despite a very unfavorable footprint on makeup. Sell-in was weaker than sell-out due to destocking of retailers, mostly in the U.S. and mostly on makeup. Excluding makeup, sell-in for the consumer division was flat over the semester.

E-commerce for the consumer division accelerated all over the world, particularly in the United States, where its online turnover more than doubled over the period. The division had an outstanding semester in China and is also gaining market share in most major European countries and, good news, is back to growth in Brazil despite a difficult market.

In terms of brand, L’Oréal Paris is resisting better than the market, thanks to strong performance on skincare and hair color. Garnier continues to gain share, driven by haircare. And of course, the division’s makeup brand, Maybelline and NYX Professional Makeup, were heavily impacted by the slowdown of the category.

Active Cosmetics is remarkably gaining market share globally, particularly in North America and Asia-Pacific, in a market that is still slightly negative. E-commerce was, for Active Cosmetics, up more than 80% in the semester, growing at almost twice the speed of the market. Three brands lead the growth. CeraVe was up 62%, which is amazing. SkinCeuticals continue to grow fast everywhere. And La Roche-Posay is also positive in every zone. The division’s excellence in digital has allowed it to build closer relationship with consumers and the medical community.

By region, we are gaining share in Western Europe and New Markets. In Western Europe, where we see the first signs of recovery, we are gaining market share, especially in the UK., France, Italy and Spain. In the U.S., where the crisis is still ongoing, we are slightly behind market due to the strong headwind on makeup. However, we are outperforming in skincare, and our sales in e-commerce are accelerating.

The new market zone was the least affected, thanks to the outperformance in Asia-Pacific, driven by Mainland China. L’Oréal is leading the rebound in this country. We are gaining share with growth of 17% over the semester in a negative market and with Q2 at plus 30%. We are extending our lead, thanks to online sales that are powering ahead, driven by our expertise in digital activation and the big online shopping festival such as 6.18 in which L’Oréal Paris and Lancôme brands ranked number 1 and number 2. And finally, we are gaining share in all strategic categories, particularly skincare.

There are four main reasons for this global exceptional resilience. First, thanks to our leading e-commerce, which has grown even stronger during the crisis. E-commerce sales jumped by plus 65% in H1 and now represent, on the semester, 25% of our total turnover, growing almost twice the speed of the market and accelerating every month, even as stores are reopening. For the first time, online sales are growing faster in countries outside China, like, for example, the US or Western Europe.

Second reason, we have capitalized on our excellence in digital. Our brands are creating more personalized and engaging consumer experiences with amazing digital services, like virtual try-ons, diagnostic, tele-consultations and shoppable live streaming. All this is building stronger relationship between our brands and consumers. In China, for example, 5 of the top 6 brands in L2 Digital IQ ranking are now L’Oréal brands. Digital also enhances our return on investment on media with sharper targeting. 60% of our media was on this first half digital.

Third reason, the power of our brands and hero products. In times of turmoil, like now, consumers turn to quality to strong aspirational brands they can trust. Our brands offer exceptional quality, safety, efficacy and a clear sense of purpose. Big brands were already winning before the pandemic and continue to outperform during the crisis.

Fourth reason, very important also, the fantastic dedication and agility of our teams. Their extraordinary mobilization, energy and talent have been crucial in navigating extremely violent shifts in categories, channels, et cetera.

Then, as you heard from Christophe, L’Oréal has also delivered very solid results. The profitability at 18% remains very high, and is close to the annual level of 2019. We have limited the impact on net earnings per share at only minus 12.7%. We have preserved our P&L with a high gross margin, unchanged compared to last year, and lower SG&A, thanks to strong cost discipline.

We acted with anticipation, immediately implementing strict measures to control expenses. We were one of the first companies in the world to impose a travel ban and freeze head count among many other actions taken. We have protected our business drivers. Research and innovation expenses were sustained in absolute value to secure our innovation stream and fuel future growth. And A&P investments were maintained in relative value.

Country by country. We smartly adapted our plans to maximize return on investment as the situation evolves. We increased spend in highly efficient drivers such as digital, but cut where it was less relevant, for example, in-store. Lastly, our operating cash flow has shown resilience despite the financial support we have given to our most fragile partners, and our financial situation has remained very solid.

Finally, we are entering the second half with lucidity, confidence and resolve. Lucidity, first, because, of course, the sanitary crisis is not over unfortunately. It is still ongoing in many countries, especially in the Americas, with some risks of rebound around the world. But we’re also entering the second half with confidence because we think that the market will be stronger.

The good news is that consumers’ appetite for beauty is absolutely intact, and moreover, stores should remain open as the world will probably not experience the same lockdown phenomena as in H1. And e-commerce is still gaining power everywhere. The beauty market has always been resilient on the long term and growth will resume.

And lastly, we are also entering this semester with resolve to redynamize our business. We are working actively with our retail partners to stimulate consumption and create opportunities everywhere. We have strong launch plans and product initiatives for the months to come in every division and every zone. And we are increasing our media investment everywhere to grow our market shares and drive our sales.

And as you’ve seen, our commitment to the future in terms of responsibility and sustainability is stronger than ever. As you have probably seen, we have set very ambitious new sustainability goals for 2030 with the launch of our L’Oréal for the Future program. To conclude, we are determined for the second half 2020 to outperform the market, find again the path to growth if the sanitary conditions allow it and deliver solid profitability.

Thank you very much. And now we are ready for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Celine Pannuti calling from JPMorgan.

Celine Pannuti

Yes. Good morning. So I was preparing for a few questions, but I shall start with my first one, then. E-commerce, could you give us a bit more details behind what is D2C versus your usage of third platform – third-party platforms? And as well if we can understand a bit the profitability. And does it mean that as you ramp up the businesses in developed market, the profitability is a bit lower? Thank you.

Jean-Paul Agon

Good morning, Celine. I’m glad to see that you are again, the first one to ask questions. So welcome back. So e-commerce, you’re right, is the most important topic of this first half. You know, e-commerce has seen an acceleration as never before. And in terms of penetration of e-commerce in our business, we have progressed this last 10 weeks as much as we did in the past –in the previous three of four years.

And as I said, I think what’s very important is that, we don’t see a slowing down of e-commerce as stores reopen. So the capacity of the company to excel in e-commerce is more vital and strategic than ever. And by the way, when I said that we grew by 66% on the first half, it’s an average growth. When you look month-by-month, in fact, at the end of the period, we are growing even more than that.

For example, it grew by 75% in May or 82% in June. So I believe that also the 25% average percentage of sales will be for the last month of the period higher than that. So e-commerce is the new name of the game.

So to answer your questions, as usual, you know we have a good split between the different type of players. Let me find again my slide. So it’s split between the e-retailers, the online pure players and the direct e-commerce, and the weight is pretty well split. E-retailers represent 30%; online pure players, 27%; and D2C, 43%.

And as you know, direct e-commerce is made of two parts. One part is Tmall and the other part is all our own sites. And the very good thing in this first half is that for the first time, we have seen a very strong acceleration of our own sites. And if I remember well, they grew by something like 80% or something. So it was a real tipping point in terms of acceleration of our own sites.

And finally, your question about profitability. You know that we don’t disclose profitability per channel. And also, it’s becoming more and more difficult to do it because, clearly, e-commerce is embedded today in all our businesses. It’s true for all divisions. It’s true now for all countries. And so it’s completely embedded in our business. But what is sure is that, it has clearly a relative impact on our different businesses, and again, this is true for our four divisions, okay?

Celine Pannuti

Thank you. Can I have a follow-up question?

Jean-Paul Agon

Exceptionally for you, yes.

Celine Pannuti

Thank you. Since we are on profitability, yesterday you gave an interview and you said that H2 margin will be handsome. I just wanted to understand if you could maybe quantify or help us qualify a bit more what that means. And does it mean that we should expect since top line is recovering, that the margin will be up year-on-year in the second half?

Jean-Paul Agon

You know, I was sure yesterday giving the article that handsome would create and trigger some interesting interrogations. You know, of course, we don’t give guidance. But I know that you try every time, but we don’t give guidance. But you know, I am sure that you’re smart enough, all of you too, to guess what handsome could mean. But it means also, when I say that, it means also that we are not worried about profitability for second half.

We are not worried for different reasons. Number one, we believe that top line will be better because, again, as I explained, the market will be better. We will probably not experience the same lockdowns. E-commerce is still getting traction and will accelerate. So we think that the top line will be significantly better, of course, number one.

Number two, all the measures that we have taken in terms of cost discipline, in terms of cost reductions in this first half will be maintained in the second half. So it’s super important for the margin.

Third, it’s true that we want to invest. As you have seen, I’ve also said that we want to go on the offensive again in terms of launches, media, activation plan in the stores with our partners. But this – because the top line will increase. And because also, globally speaking, the cost of A&P, I would say, is lower today – will be lower in the second half than it had been in the previous years. This will not put pressure on the margins.

There are also some other factors that are interesting to know. For example, there are many things that we are cutting. One example is the testers for the makeup display around the world. You know that we spend a lot of money – we used to spend a lot of money on testers for this – for makeup display. But now consumers don’t use these testers. So we have completely stopped any delivery of testers, and we are replacing that with our virtual testers with ModiFace.

And many, many things that we are doing like this are, in fact, very significant reduction of A&P costs mostly in stores. So we are absolutely not worried. We think that we can really reinvest and fuel the growth again without any pressure on the margin for the second half.

Celine Pannuti

Super, thank you so much.

Jean-Paul Agon

Thank you, Celine.

Operator

The next question comes from the line of Guillaume Delmas calling from UBS.

Guillaume Delmas

Good morning, everyone. One question for me. It’s about when you talk in the press release about an aggressive plan of new product launches and the business drivers to stimulate consumption for the second half, does this mean that, at least, at this stage, you do not expect a crisis shift from being supply-led in H1 to being demand-led in the second half? And if I remember well, back in 2009, when we experienced that demand in crisis, you came up with some essential range to make sure consumers would not trade out offshore portfolio. Do you have anything in your pipeline you know, similar to this, just in case we were to see a meaningful deterioration in demand?

Jean-Paul Agon

Okay. That’s a good question. You’re right, we think that we will not see anymore the same type of supply crisis, because I think that everyone has understood that making lockdowns everywhere in the world is too destructive, devastating for the economy. So I think that stores will – people will find a way to keep stores open.

And also, as I said, e-commerce is becoming more and more an alternative. So I don’t think that we will see anymore supply crisis. But you’re right, the danger, the risk now is that it transforms into a demand crisis. For the moment, we haven’t seen it. So maybe we will see in the fall. But we are – I think we are well prepared.

Number one, we have seen in the past that beauty products, cosmetics, in general, are very resilient to this kind of demand crisis, because if there is an economic crisis, consumers would more hesitate before buying some expensive items. But generally, it has been proven that they want to indulge themselves with non-expensive products like beauty and beauty is an important part of your daily, I would say, quality of life. Number one. And so we are – I’m not worried about the impact on the beauty market on the consumption of this potential demand crisis.

And two, of course, we will see. I don’t have a crystal ball, but I’m not really worried. But it’s also why we are fueling the growth, and that’s also because you know market – beauty market needs to be fueled and need to be stimulated, and we think that it’s our job and our best interest to stimulate the market with new innovations, new products, activations.

And I have to say that, by the way that all our retailer partners are super happy that we are going – following this route, because they need also us to stimulate the return of consumers into their store, the return of consumption. And we have called these operations around the world back to beauty operations, and apparently, they are working very well. We started in summer, and they are starting very well and we will continue them over summer and in September, October.

And to finish with your question, in fact, to be honest, we were not that successful with our basic essential product in 2008 and ‘09. At that time, we thought that it was what consumers would like but, in fact, it was not really successful. In fact, in terms of beauty, consumers are always interested by quality, efficacy, innovation, valorization and they are not really – it’s not the type of products on which they are interested by value-for-money offering. Or another way to make value for money is more to offer sizes that are more affordable, and we are doing that too. So I have to say that we are pretty confident about that.

And it’s true also that you know on the first half, because the crisis just happened, we were a little bit in the expectative, not knowing exactly what would happen. Now we have a much better visibility, even if, of course, the sanitary situation is not resolved unfortunately. But still, we have a much more visibility and we want to really go on the offensive now.

Guillaume Delmas

Thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question comes from the line of Richard Taylor calling from Morgan Stanley. Please go ahead.

Richard Taylor

Good morning, everybody. I’d like to ask a question about North America. A little while ago, you made what looked like a very significant change in the management team thereafter a few years of, let’s say, disappointing growth. And it looks like in the first half this year, there’s, let’s call it, a giant digital lead going on in terms of the e-commerce development, maybe sort of three years’ worth of growth in just a few months. Can you give us some insight in terms of what this means for your business combined with the change in management? You obviously have a lot of experience from China, especially in digital.

Jean-Paul Agon

Yeah. No, no, I think you’re right. It’s a good question. You know, of course, as I said before, I mean, our team previously in America was a very good team, and this new team is also very good. It’s a fresh crew, as I said. But you’re right to say that it’s a fresh crew with a very strong acumen on digital and e-commerce. In fact, the real revolution in e-commerce that we undertook first was in China.

And by the way now, our business in China is more than 50% in e-commerce. So e-commerce has completely transformed the way we market products in China. And we were a bit late in the US. And you’re right to say that it is the mandate of the team now, and especially of the new CEO of L’Oréal USA, Stephane Rinderknech, to accelerate the transformation and the penetration of e-commerce in our business.

And by the way, they are pretty successful at it. you know in this – if I remember well, I mean, the growth in e-commerce for our business in the US was more than 100%. You know it’s the first time that we have a triple-digit growth in e-commerce generally and especially in the US. So US is really following the Chinese way, in a way, nothing political therefore of course. And so I’m pretty confident.

We have also to acknowledge the fact that in this first half, the US was really handicapped by the very strong footprint in makeup. For obvious reason, makeup has been the most difficult category in this first half, and it’s very, very obvious because when you – consumers are confined, when they wear masks, when there are less interactions, when they are working from home, definitely, it doesn’t really help consumption of makeup. And so it’s not going to last forever.

But for a while, it has been a handicapped for us. And definitely, part of the world where makeup is the most important is definitely North America. For example, in masks, in North America, it’s 47% of our business this year in S1 and historically, it was even more than that. It was more than 50% of our total sales. So that’s why we have definitely unfavorable footprint on makeup, at least, in this first half in the USA.

So on some – on other, I would say, channels and categories, the US did very well. They were the most successful in professional, by the way, thanks to SalonCentric. You know the – thanks to SalonCentric, we have been able to really to provide all the stylists in America to start again their businesses. And this is also the place in the world we have been the most successful with Active Cosmetics, with amazing results on CeraVe. So all in all, if the US – in fact, without this headwind on makeup, the US is doing a good job, and we are pretty confident for the second half and for the future.

Richard Taylor

And then maybe just as a very quick follow-up. It looks like there’s been some significant changes in China in terms of the evolution of duty-free with the reshoring and the creation of these duty-free zones. Maybe you could just give us a very quick perspective on this and what it means for your business?

Jean-Paul Agon

Yeah, absolutely. You know, this has been also a very good news in this first half. As you know, Chinese consumers are not traveling abroad since the beginning of the pandemic. So obviously, it has created some disruptions in terms of business. It has some negative, but also some positive effects.

The negative effect is maybe that they are buying less in countries like Korea, Japan, et cetera, which, for us, by the way, is not such a problem because when they were shopping there, they were shopping mostly local brands. So for us, it’s not a problem.

And then on the opposite, the fact that Chinese consumers stay in China is a very positive thing because, as I said several times, China is the country where we have the highest market share in luxury market. We are – I think we are 27% market share in China, which is the highest ever in the world. And the fact that when consumers stay in China, the probability that they buy one of our brands is higher than when they go abroad.

And regarding travel retail, you’re right to say that Hainan has become the alternative solution for all Chinese consumers who want to go somewhere, to go to the sun and go shopping. And the Chinese authorities have really encouraged that by creating a huge – an amazing shopping experience in Hainan with a huge number of flights. And also, they have recently increased the –

Christophe Babule

The cut.

Jean-Paul Agon

Sorry?

Christophe Babule

They have increased the cut from RMB 30,000 to RMB 100,000. So they have tripled the possibility.

Jean-Paul Agon

Yeah. So as Christophe explained, they have tripled the possibility for Chinese consumers to buy detax in Hainan. And they are really, obviously, want to create another destination for Chinese shoppers. And we are – and we were, from the very beginning, working in this direction. So we are very well established in Hainan with all the key contacts and the key partners.

So this has been a very important relief of the travel retail business. And if I remember well also, I think that Hainan has represented something like 40% alone of the total travel retail market in the past few months. Of course, market that has been reduced, but still it’s a fantastic new opportunity.

Operator

The next question comes from the line of Marion Boucheron calling from MainFirst. Please go ahead.

Marion Boucheron

Hi, good morning, everyone. A few questions for me, please. The first one on the consumer division and the trends you’ve been seeing between sell-in and sell-out. Would you say that could evolve in H2? Do you think there could be a restocking or at least, sell-in aligns with sell-out?

The second question would be on China. Would you mind giving us the e-commerce growth rate in the second quarter there? And third one on travel retail. How did it evolve in the second quarter?

Jean-Paul Agon

Okay. So many questions. So the first one was consumer division. Yeah, yeah, I think that you know I’ve seen in some notes that some comments have been pretty severe with our consumer division and I think it’s a bit unfair because I would like to explain two things.

First, in fact, as you have seen in the categories, the category that has really suffered for the consumer – for the mass market has been makeup. And we can estimate that globally, the market — the mass market without makeup was probably around flat and it was the same for all division, by the way. The sales of the consumer division of L’Oréal in this first half was flat without makeup.

And so the – in terms of sell-out, we estimate that the sell-out of our division was in line with the sell-out of the market at minus 5%, 5.5% something like that, with makeup, because the fact that the makeup is so negative on this first half makes the market go from flat to minus 5%. And then the dip, minus 5%, minus 6%. And then the difference is also due to makeup again, because with the reduction of the sell-out of makeup, obviously, many retailers, and especially in America, have been obliged in a way to reduce their inventories.

And also, you have another factor, which is the pipe of the launches. You know that in makeup, every year, makeup is a category where you have to launch many products every year. And so the first half of every year is also really made of pipe of new launches, which didn’t happen this year. So in fact, we are comparing this first half where we didn’t – where the makeup sell-out were down, where there was a destocking, and there were also much less launch – not even less, there were no launches in makeup and this creates this discrepancy between the two periods.

So for the same reason, we are confident that the second part of the year should be better. It’s difficult to know exactly yet how much. But number one, we think that makeup will get better. Number two, in terms of consumption – in terms of consumption, number one. Number two, we should not see again this destocking effect. And number three, we are now launching products and makeup products that we were not – that we stopped in the first half. So there should not be this discrepancy again on the second half.

So all in all, I just wanted to make this point clear. I think our consumer division did a good job. But really, they were really handicapped by their very heavy weight on makeup, and this is clearly one of the reasons, when you compare with some of our competitors that don’t have makeup or that got rid of makeup, for some years, it was – it didn’t help them. It happens that it helps them now. But I’m pretty sure personally that makeup will come back and it will again be a tailwind. All right. So there was a second question about e-commerce in China. So e-commerce in China has been strong. For example, on the total semester, we have been at plus 58%.

You want to comment the numbers, if you have them, Christophe?

Christophe Babule

Yes. We end up the first half with the growth in China at a little bit more than 58%. And between Q1 and Q2, I think it was also your question, we are more at the same pace of growth, a little bit higher than 60% in Q1 and over 50% in Q2. Very strong 6.18 in China, as you know, where our brands took most of the top positions in the ranking in Tmall.

Jean-Paul Agon

Yes, that’s pretty amazing. So it’s true that you know China is becoming more and more e-commerce and e-commerce is becoming more and more animated through this special festival, like 6.18 like 11.11. So it also indicates that the evolution will not be steady, because what’s very important is to be successful during this festival that concentrate a lot of the business and also, obviously, because consumers are waiting for this festival because there are special offers that are made during these festivals and the Chinese consumers are smart. And of course, they wait some time for the festival to – before buying their products.

So it’s a new element of doing business in China. But I have to say that, as it was said in a question before, the learnings that we are taking from our super performance in China are extremely strategic and vital for us. And because they are shared now with every country in the world, and this first half has demonstrated that now every division in every country is maximizing this opportunity. And you had a third question that I don’t remember.

Marion Boucheron

It was travel retail.

Jean-Paul Agon

Travel retail. So travel retail has been obviously tough. But to be honest, a bit less terrible than we thought also because I think our teams did a very good job. We are at minus 22 at the end of first half, which is a bit, as we say in French, [foreign language]

Marion Boucheron

How did you do that?

Jean-Paul Agon

That’s a good question. But number one, we had a very good beginning of the year. We started the year with a very strong performance on the travel retail, number one. And number two, as I explained, we were really able to maximize every opportunity, including the special opportunities created by the Chinese travelers in Hainan.

There are also some specific operation on e-commerce that are made with – between Korea and China. So fact, it’s – but it’s you now the business is now almost only in travel retail Asia. The travel retail Asia now represent –

Christophe Babule

More than 80%.

Jean-Paul Agon

More than 80% of travel retail. So the name of the game, at least, for the next one or two years, until the air traffic gets back to a normal stage, the name of the game is clearly travel retail Asia, where we are pretty well equipped. We have a great team and a great collaboration with the operators there. Okay.

Marion Boucheron

Okay. Thank you very much. Have a good day.

Jean-Paul Agon

Thank you very much.

Operator

The next question comes from the line of Fulvio Cazzol calling from Berenberg. Please go ahead.

Fulvio Cazzol

Yeah, good morning and thank you for – good morning, thank you for taking my question. It is on gross margins and I know that you highlighted on an underlying basis, gross margins were only 25 basis points lower year-on-year, which I thought was actually quite impressive, given the you know volatility to the top line.

So I was just wondering if you can maybe give us a bit more detail on some of the drivers to that gross margin development, because I’m guessing that with makeup underperforming, skincare proving more resilient and also your D2C sites doing quite well, I guess there’s probably quite a significant mix contribution there to the gross margin, maybe some productivity, lower imports. So I’m just trying to understand what the moving parts are on that, if you’re able to provide those? Thank you.

Jean-Paul Agon

We are able, absolutely. But in a way, I think you answered very well your own question. Gross margin has been preserved 100% because we were at 73.1% last year’s first half, and we are still at 73.1%, with a little help from the currencies, but still at the same level. And you’re right, that it’s a bit pretty good result.

But I think you said the right thing, number one. The one thing that you didn’t say is that, we are still valorizing, and I think that it’s a pretty strong indication of what we are doing. You know even in this pandemic, even with all the constraints, even with the disruption caused by this situation, we were able still to valorize in this first half of 2020. We were able to valorize by 2.4% on the four divisions. So it’s super important, number one.

Number two, you’re right, there is a mix effect, which is positive, in a way. It’s more skincare. Skincare is the best category in terms of gross margin. More e-commerce and especially D2C. D2C is also very relative for gross margin.

Number three, more China, which is also relative. And on top of that, I think that our teams were able to implement also in the factories, in the warehouses, in terms of distribution, some very strong cost discipline measures and thanks to all that, gross margin has stayed high.

You want to complement maybe, Christophe?

Christophe Babule

Yes. On the upside, just to give a little bit more flavor. We have, as Jean-Paul said, a plus in both valorization and mix effect and a negative impact coming mainly from distribution costs because, as you know, with the huge digital leap, we have higher distribution costs in most of our countries.

Jean-Paul Agon

So that’s why we are also pretty optimistic about the rest of the year for the gross margin that should stay at a good level.

Fulvio Cazzol

Great, thank you very much.

Jean-Paul Agon

Thank you.

Operator

The next question comes from the line of Javier Escalante calling from Evercore. Please go ahead.

Jean-Paul Agon

Good morning, Javier. He’s not here.

Operator

He’s just removed his questions, apologies. So we’ll move to the next person, which is Iain Simpson calling for Barclays. Please go ahead.

Iain Simpson

Morning, all and congratulations for protecting profitability against such a challenging backdrop. I was just wondering – speaking of which, I could just wonder if we could dig into a little bit how you’ve managed that. Because when I look back to the global financial crisis, it took you five years for margins to recover to pre-crisis levels.

And now looking at your commentary, you know, who knows what handsome means, but perhaps margins recover a bit quicker this time around. So perhaps anything on how this crisis is different to 2008 or perhaps how you’re different to how you were in 2008, that means you seem to be finding it a bit easier to protect your profitability.

And if I could as well as a sort of follow-up on something you said earlier. In terms of potential structural legacy of COVID-19, shift to e-commerce is clearly very good news. It looks like we might be wearing masks for a while. Could that mean that makeup is perhaps subdued for a bit longer than we would have thought? And also, are you seeing consumers move back into the professional color category now things have reopened? Or have they discovered that actually home color is a better product than it was?

Jean-Paul Agon

Okay. No, thank you very much for the good questions. First, margin, you’re right. It’s an important topic. Number one, it’s true that this crisis is very different from the previous one – or from the previous one because, as you know, I have been experiencing many crises in my career, so I can compare and this one was totally different. As I said, the fact that it’s a supply crisis and not a demand crisis, changes everything. It changes everything. It changes the way we have to react. It changes the mix. It changes everything. And also, it changes the, I think, the resilience of the margin.

So we delivered this margin at 18%. I think the right way to look at it is more to compare it with the total margin of last year. Last year, margin was 18.6%. We are at 18%. I said that also because you know for many years, it happened that we had a higher margin in the previous year than the second – in the previous – sorry, in the first half than in the second half, but it’s not written in the model. So it means that the margin for the second half, as I say, can be handsome as Celine mentioned it. Also because the conditions of the activity this year are pretty different.

So to get back quickly to your question. Definitely, I don’t see any reason why it would take us long to get back to the pre-COVID margins. I’m not talking about this year, of course, because this year is a completely abnormal year. But you know if we are in a – if we are back next year into a situation where kind of normal activity can happen and, of course, that will depend on the sanitary conditions, I think that there is no structural reasons to anticipate difficulty to get back to the level of margin that we had, number one.

Number two, Francoise? No? Sorry? Yeah, yeah, yeah, you’re right. Francoise is telling me something very important. As I mentioned it also, I think in another question, is that you know one of the reasons also why we had a dilution of the margin in 2008 and ‘09 was not only the crisis, but it was also the moment of the acquisition of Yves Saint Laurent boutique and that’s – this is one of the key reason why it took us a few years to get back to the pre-crisis profitability because of the progressive ramp-up of the profitability of Yves Saint Laurent boutique.

So we are absolutely not in this situation right now. On the contrary, you know we have sold or stopped some businesses that we are not making money. We have – the only one that we have acquired is making money. So we have absolutely no dilution effect. So again, I think that we can all be very confident about the margin.

Number two, post-COVID, we will see. We will see. You know we will adapt. We will be creative. I don’t know how long we would be wearing mask. I hope that it won’t be too long, but I’m sure also that, for example, for makeup, I’m sure also that we will – that consumers will be happy to wear makeup when they don’t wear a mask or – and they don’t wear a mask 24/7.

And also, there are also other makeup opportunities. For example, obviously, when you can’t see the lips, eyes are super important. And so we want to develop very strongly the makeup for eye or foundation or stay-on foundations and there will be opportunities. I’m not worried, and I can tell you that thousands of marketers are working actively on very creative ideas to adapt to this post-COVID world, okay? Hello?

Iain Simpson

Thanks very much.

Jean-Paul Agon

Okay, thank you.

Operator

The next question comes from the line of Jeremy Fialko calling from HSBC. Please go ahead.

Jeremy Fialko

Hi, good morning. Jeremy Fialko, HSBC. Thank you. One question for you on e-commerce. I guess, it’s obvious that you’re going to get a very, very big boost to e-commerce when all of the stores are closed. So could you talk a little bit more about, when you look at the data behind it, to what extent is the e-commerce boost just through, let’s say, replenishments and people buying the products and the brands, which they know? And to what extent is it actually being able to stimulate new consumption and use of purchase occasions? And then perhaps also linked to that, whether you can contrast the situation in China and sort of outside China in that sort of perspective? Thanks.

Jean-Paul Agon

Yes. You know I think that this COVID crisis, again, as I said, was a tipping point, because consumers don’t, in all countries, except China, where it was already the case, consumers don’t see e-commerce anymore as they used to see it. It’s true that before maybe they used to see it as a replenishment and – but now it has changed. You know, because they have been using this channel for one, two, three, four months now. And they have been experiencing the service, the quality, the choice, and also the services that we are offering ourselves like ModiFace everywhere.

In fact, e-commerce is now seen by all consumers as a real alternative in terms of shopping and not only as an option for replenishment. And that’s why I think that what we are seeing right now is that in the different countries, when stores reopen, e-commerce keeps growing. It is not stopping or the growth is still there. And that’s what also what we have seen in China.

So I think that what happened in China is progressively happening everywhere. Of course, it starts from very different levels. In the UK, for example, I think that we are doing today more than – how much are we doing in the UK, 15%?

Christophe Babule

30%.

Jean-Paul Agon

30%. We are at 30% of sales in e-commerce. And in some different countries, it starts to be pretty amazing. It’s 23% in the United States. It’s, of course, 40% in Korea. It’s 25% in Japan. But even in countries where we were very, very low like Brazil, it’s now 10%; Chile, 14%. You know even in Spain, it’s 10% now; Greece, 13%.

So e-commerce has really taken its own share of the business and its own share of the choice of consumers. And I think it’s here to stay or even here to grow. And in a way it’s, I think it’s good for us because we know that why is it good? Number one, because we know that contrary to what people think, e-commerce favors big brands and hero products. So because we – I think we discussed that several times, because of the algorithm, e-commerce, even if it offers unlimited choice and either choice in terms of products and brands, in fact, favors big brands and hero products because of the algorithm, number one.

Number two, because of our, I would say, expertise and proven excellence in e-commerce, this is, for us, clearly a competitive advantage. Also, thanks to, as I said, all the services that we are now offering on e-commerce with ModiFace, like a virtual try-on on makeup, on hair color, on skincare, skincare diagnosis, et cetera, et cetera.

And third, because, of course, also, there is this relative aspect of e-commerce, which is very positive. So it’s clear that for us also, it’s a tipping point. We were already very e-commerce. We’re probably one of the most advanced companies in terms of e-commerce, but we are going to become e-commerce – not e-commerce first, but almost e-commerce first in our business because this is the, as we say in French, [foreign language], that’s where the history is taking us.

Jeremy Fialko

Okay. thank you very much.

Jean-Paul Agon

Thank you.

Operator

The final question comes from the line of Chris Pitcher calling from Redburn. Please go ahead.

Chris Pitcher

Thank you very much. Obviously, there’s been a lot of talk today around beauty tech and your ModiFace acquisition. Could you give us a bit more color on how the ModiFace model has evolved? What sort of penetration and share does it have with third-party online retailers? How early is it in terms of the in-store application? And how much of it is generating your own sales? And is it possible to determine the sort of sales contribution from ModiFace? And how is this changing your relationship with retailers? You mentioned earlier that retailers look to you to drive footfall. But with the increased rise of e-commerce in your business and an increasingly significant alternative challenge, is it increasing your negotiating partners’ power with your retail partners? Thanks.

Jean-Paul Agon

Yeah. Thank you very much. It’s a very good question. I won’t be able to give you the contribution of ModiFace exactly to business. By the way, it’s an interesting element, but I don’t even have the information. But what I know is that, it has been super instrumental. First, because since the acquisition of ModiFace, what, three years ago now, we have really been able to expand it to all our divisions and all our brands. You know when we acquired it, that was the goal. The goal was to be able – instead of having them working with some clients, we told them, you know, come with us, and you will be able to work with all our brands in all the countries of the world and that’s what’s happening now, including China, by the way, number one.

Number two, we have expanded the number of services. So as I said, we started with a virtual try-on for makeup, but expanded it to hair color or haircut, skincare diagnosis, acne diagnosis, and I’m forgetting others. And the possibilities are infinite, because you know, virtual reality also help with the artificial intelligence, open new horizons that are absolutely infinite.

Third, we have a partner – we have offered ModiFace to, I would say, all – progressively all our e-commerce partners. Of course, the e-retailers or the e-commerce branch of our retailers, like boots.com, sephora.com, macys.com, you name it, but also with ulta.com, but also with Amazon. And of course, on our brands, of course, on our makeup brands, mass market makeup brands. We don’t sell luxury on Amazon.

And as you said very rightly, it has created a completely different type of partnership between them and us. Because for them, also, it’s a great competitive advantage as a platform or as an e-commerce player to be able to offer the service to consumers, it’s super important. So it helps also in our negotiations with them.

It helps in the way that we are considered as privileged partners. And it helps also the increase of penetration of e-commerce. I’m pretty certain that one of the reasons of the acceleration, of our strong acceleration in e-commerce in the past 12 months and especially in the recent month is, of course, due to the COVID crisis, but also due to these services that we are offering.

And when I said, by the way, that we are partnering with our retailer partners to create this Back to Beauty operations, it’s not only brick-and-mortar. It’s Back to Beauty everywhere. It’s Back to Beauty in store. It’s Back to – and in every possibility, it’s Back to Beauty in salon, Back to Beauty in perfumeries, Back to Beauty in mass market, Back to Beauty in pharmacies or Active Cosmetics. And of course, Back to Beauty or, let’s say, more even to beauty for e-commerce players.

So this is super important. And we see that as super critical. I think that this acquisition has been one of the best that we did in the past 10 years, as it has given us a smart weapon, super-competitive advantage that we are using 100%. And we are working on new developments that are still confidential, but that will give us even more edge in this direction, okay?

Thank you very much. So thank you very much for all your questions. We wish you a great summer, stay safe and healthy and we’ll be happy to see you again in, what, in October?

Francoise Lauvin

Yeah.

Jean-Paul Agon

Okay. Thanks a lot. Bye-bye.

Christophe Babule

Thank you.

Operator

Thank you for joining today’s call. You may now disconnect your lines. Hosts, please stay connected.





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After monster rally, investors cautious as U.S. recovery wobbles By Reuters


© Reuters. FILE PHOTO: The spread of the coronavirus disease (COVID-19) in New York

By April Joyner

NEW YORK (Reuters) – Investors are preparing their portfolios for a potentially rocky patch in U.S. stocks, worried that a dramatic rebound in equities may stall amid dimming economic data and rising political uncertainty.

Most money managers are wary of cutting equity exposure too drastically in a market that has rallied more than 40% since late March and stands near all-time highs despite widespread economic devastation and a global coronavirus pandemic.

Still, the continued divergence between stocks and the real economy has worried some investors. U.S. growth took its worst hit on record in the second quarter, while more recent data points to fading consumer confidence and jobless claims back on the rise. The S&P 500 (), meanwhile, stands some 4% below all-time highs, though its weekly advances have grown progressively smaller in July.

That disconnect is pushing some investors to beef up cash positions or tilt their portfolios toward Europe, where economic prospects appear to be brighter than in the United States.

The performance of options strategies designed to profit in sideways markets – such as the “iron condor,” which involves long and short positions on both calls and puts – has also improved. The iron condor strategy has drawn controversy and prompted investigation by some legal firms following its poor performance during sharp sell-offs, such as in December 2018.

“The longer (economic weakness) persists, the more permanent the structural damage becomes,” said Michael Hans, chief investment officer at Clarfield Citizens Private Wealth in Tarrytown, New York. “For the moment, a range-bound scenario makes sense.”

Concerns over the U.S. presidential election are also mounting. On Thursday, President Donald Trump suggested on Twitter that the Nov. 3 vote be delayed, though he has no direct authority to do so.

Net outflows from equity funds were $1.8 billion in the fourth week of July, while bond funds took in $17.2 billion and money market funds received $5.5 billion, according to EPFR.

Market participants hope the Labor Department’s July payrolls report, due next Friday, will shed more light on the state of the recovery.

Some investors who have racked up big gains during the equity rally of the last few months are now turning cautious.

Eric Marshall, portfolio manager at Hodges Capital in Dallas, has sold some of the stocks he purchased earlier in the year and added to cash positions, convinced that rewards have diminished for buying even the most beaten-down shares.

“We’ve taken profits, and we’ve been very slow to redeploy that money back,” he said.

Uncertainty over the near-term outlook for equities and Treasury yields near record lows have prompted Charles Day, a private wealth manager at UBS in New York, to raise cash holdings to between 5% to 10% in the portfolios he manages.

“Normally the safe-haven money would be on the fixed-income side, but having some cash for a while seems to be prudent to me,” he said.

Others see greater opportunities in European stocks than in U.S. equities, in part because of the region’s lighter COVID-19 caseload.

Ben Kirby (NYSE:), co-head of investments at Thornburg Investment Management, recently added Deutsche Telekom AG (DE:) to his portfolio, betting the company will benefit from a sustained shift to remote work.

“As the S&P has been rallying, we’ve been reducing our exposure to domestic stocks,” Kirby said. “Europe is looking increasingly resilient.”

Range-bound U.S. stocks could still be lucrative for some investors, however.

Choppy trading in U.S. stocks has helped keep the Cboe Volatility Index () above its long-term average even though shares overall have moved minimally, strategists say.

That is a favorable environment for short-volatility strategies, said Stacey Gilbert, portfolio manager for derivatives at Glenmede Investment Management in Philadelphia. Option sellers expect to collect income when expectations for market gyrations remain high but actual moves are more muted.

Likewise, an index that tracks the S&P 500 “iron condor” options strategy () – which profits in range-bound markets and had been badly hit this year – is set to post its first monthly gain since last October.

“Many people think that the recovery has mostly done what it’s going to do” for now, said Mike Zigmont, head of trading and research at Harvest Volatility Management, which specializes in iron-condor strategies. “There’s not much upside, but there’s not much downside left, either.”





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Clashing with Democrats, Republicans want to raise standard of proof on COVID-related lawsuits against companies


Republican leaders are making added liability protections for businesses, schools and health-care providers a key plank of their $1 trillion proposal for another coronavirus relief bill.

Now it’s a question of whether that shield turns into a stumbling block during negotiations with Democrats.

The Republicans’ HEALS Act would authorize a new round of direct checks, 70% wage replacement in supplemental unemployment benefits, and a liability shield that would let consumers and employees successfully sue for coronavirus exposure only if they can prove “gross negligence” or “willful misconduct.”

When it comes to COVID-19-exposure lawsuits, the proposed shield raises the standard of proof from what’s applied in ordinary tort cases, with meritless lawsuits subject to a fine of up to $50,000. Anyone who sues for exposure has to list all the people and places they visited, and all the people who visited them, in the two weeks before the onset of symptoms.

The added protections would stay in place until October 2024. They would also apply to nonprofit organizations and places of worship.

The coronavirus pandemic has unleashed a wave of lawsuits, but liability shield opponents say personal-injury cases account for a small portion. Shield proponents say that’s irrelevant because businesses need the protection before they’re served with a potentially ruinous lawsuit, not afterwards.

The HEALS Act is the Republicans’ answer to the Democrat-backed $3 trillion HEROES Act, a bill with no extra liability protections. Democrats and Republicans passed the $2.2 trillion CARES Act in March.


‘We’re not going to let trial lawyers throw a party on the backs of the frontline workers and institutions.’


— Senate Majority Leader Mitch McConnell

“We’re not going to let trial lawyers throw a party on the backs of the frontline workers and institutions,” Senate Majority Leader Mitch McConnell, a Kentucky Republican, said as he announced the HEALS Act earlier this week.

But House Speaker Nancy Pelosi, a California Democrat, has panned McConnell’s insistence on a shield, telling reporters he “doesn’t sound like anybody who wants to have an agreement or anybody who can pass a bill on the floor of the Senate.”

By Wednesday, the sides didn’t seem any closer to striking a deal on any part of a rescue bill.

So is there any middle ground on the rules for coronavirus exposure lawsuits, especially with so much at stake? Some Capitol Hill observers say yes.


‘When you read between the lines, they are saying there’s room for negotiation.’


— Stephen Myrow, managing partner of Beacon Policy Advisors

McConnell and GOP leaders are insisting on the added protections, but “when you read between the lines, they are saying there’s room for negotiation,” said Stephen Myrow, a managing partner of Beacon Policy Advisors, a policy research provider counseling institutional investors. “This not a binary thing of a shield or no shield.”

The sides could agree to things like more nuance in the statute’s language, added workplace safety rules for employees, relaxed proof standards or scrapping the $50,000 penalty, Myrow said. “There’s plenty of wiggle room,” he said.

Don’t miss: Opinion: Your boss wants you back in the office — An employment law expert explains your rights

The real stumbling block is how to proceed with unemployment benefits and direct checks, as well as aid to state and local governments, according to Ed Mills, a Washington policy analyst at Raymond James.

Republicans won’t support another bill without a shield of some sort, but Democrats, “while opposed, have not made this their line in the sand,” he said.

One solution is to give businesses immunity if they notify customers of a potential exposure within a certain time frame. Business should inform customers within 24 hours to avoid a lawsuit and could have a 14-day outer limit for the protection, two professors suggest, but they wouldn’t be protected in cases of gross negligence.


‘There has to be room for compromise.’


— Daniel Rodriguez, professor at Northwestern University Pritzker School of Law

An idea like this navigates between public-health concerns and imperatives to reopen the economy, said Daniel Rodriguez, a Northwestern University law professor who proposed the idea with Daniel Hemel, a University of Chicago Law School professor, in a Washington Post opinion piece.

Businesses have valid concerns about avoiding litigation, Rodriguez told MarketWatch, but customers need protection — and, if necessary, legal recourse. It’s hard enough already for plaintiffs to legally trace an infection to one party and win a case, he noted. “There has to be room for compromise,” Rodriguez said.

The shield might block the ‘vast majority’ of potential personal-injury cases

Republican federal lawmakers are calling for added protections at a time when a handful of states have enacted their own versions of a liability shield. Some companies — and President Trump’s re-election campaign — have also asked consumers to sign waivers. Whether these types of waivers will hold up in court remains an open question, some experts say.

“In the absence of this shield, ordinary tort liability would apply and you could sue for negligence, carelessness and unreasonable behavior, the way most tort suits are brought,” said Kenneth Abraham, a professor at the University of Virginia School of Law.


Plaintiffs can win under the GOP shield proposal if they can show ‘gross negligence’ or ‘willful misconduct.’

The proposal, however, narrows valid coronavirus claims down to “gross negligence,” which is defined as “a conscious, voluntary act or omission in reckless disregard” of legal duties, government guidelines and consequences to others.

It also allows cases alleging “willful misconduct,” which is an act or omission that’s done “intentionally to achieve a wrongful purpose … knowingly without legal or factual justification” and “in disregard of a known or obvious risk.”

Plaintiffs pressing a case typically have to persuade a judge or jury by a “preponderance of the evidence,” a standard that Abraham says boils down to being more probable than not.

But here, plaintiffs would need to make their case by “clear and convincing evidence,” a more exacting standard. The bill also requires plaintiffs to show defendants acted with a state of mind that illustrates the gross negligence or willful misconduct.

All told, Abraham said the proposal could close the door on the “vast majority” of would-be personal-injury lawsuits alleging coronavirus exposure and injury.

Personal-injury cases are a small share of coronavirus lawsuits

But Abraham and others point out there has not been a torrent of personal-injury cases about exposure.

In many outbreak-related lawsuits, it’s businesses that are suing in the wake of costly lockdown orders. They allege their insurance carriers are wrongly refusing to pay a business interruption policy, which supplies income when a business has to temporarily close for a covered event. The sides disagree, however, on whether that applies to a government-ordered shutdown due to a viral outbreak.

In other cases, consumers and college students say they’ve been stiffed over refunds for purchases or tuition.

Insurance cases constitute nearly one-quarter of all coronavirus lawsuits, according to calculations by the American Association for Justice, formerly called the Association of Trial Lawyers of America.


There were 838 insurance related lawsuits filed because of the outbreak, but 161 personal-injury cases, according to one count.

There were 838 lawsuits filed over insurance disputes and 161 personal-injury cases, the organization said, looking through a law firm’s database of more than 3,400 coronavirus-related lawsuits filed by mid-July.

Meanwhile, some high-stakes lawsuits have emerged over alleged exposure and negligence. For example, the estate of a Walmart
WMT,
-0.55%

associate is suing the retail giant in Illinois state court for wrongful death. Lawyers allege the store was negligent toward employees and customers, and that as a result Wando Evans died in March at age 51.

Walmart says in court papers that the case should be dismissed because the allegations should go to a state worker’s compensation commission, not civil court.

“We continue to mourn the loss of Wando Evans,” a Walmart spokesman said. “While we are sensitive to this situation, we do not believe these claims can be brought in a civil lawsuit.”

The spokesman declined to comment on the GOP shield proposal, but pointed to a letter from the Business Roundtable, an association of CEOs chaired by Walmart CEO Doug McMillon.


‘Narrowly-tailored liability protections will facilitate a safe and effective reopening of offices, retail outlets and manufacturing facilities.’


— A July 21 letter from the Business Roundtable to congressional leaders

The letter, sent before the HEALS Act’s unveiling, urged congressional action on a range of issues. “Narrowly-tailored liability protections will facilitate a safe and effective reopening of offices, retail outlets and manufacturing facilities,” it said at one point.

Meanwhile, Princess Cruise Lines
CCL,
-3.20%

is defending against cases from passengers who allege they were sickened due to the cruise line’s negligence. In two other cases, families are suing the company for a passenger’s death from the virus.

A federal judge dismissed lawsuits earlier this month from passengers who didn’t contract COVID-19 aboard, but said they were traumatized by the experience on board.

Princess Cruise Lines did not respond to a request for comment.

Liability shield opponents and supporters sound as far apart as negotiators on either side of the aisle.

The proposal “will make it nearly impossible to get ahead of this pandemic and more lives will be lost,” American Association for Justice CEO Linda Lipsen said in a statement.

But Harold Kim, the president of the U.S. Chamber Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, which lobbied for the shield, said that “liability protections are not and should not be a partisan issue.”

“Waiting for an onslaught of litigation to happen is like leaving your umbrella at home when there is a storm in the forecast,” he said.



Original source link

Spectrum Brands Holdings (SPB) CEO David Maura on Q3 2020 Results – Earnings Call Transcript


Spectrum Brands Holdings, Inc. (NYSE:SPB) Q3 2020 Earnings Conference Call July 31, 2020 9:00 AM ET

Company Participants

Kevin Kim – DVP, IR

David Maura – Chairman & CEO

Jeremy Smeltser – CFO

Randy Lewis – COO

Conference Call Participants

Nik Modi – RBC Capital Markets

Faiza Alwy – Deutsche Bank

Bob Labick – CJS Securities

Ian Zaffino – Oppenheimer

Olivia Tong – Bank of America

Jim Chartier – Monness, Crespi, Hardt

William Reuter – Bank of America

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Spectrum Brands Holdings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to your speaker today Kevin Kim, DVP of Investor Relations. Thank you. Please go ahead.

Kevin Kim

Great. Thank you, Angie. Welcome to Spectrum Brands Holdings Q3 2020 earnings conference call and webcast. I’m Kevin Kim, DVP of Investor Relations and moderator for today’s call.

To help you follow our comments, we have placed a slide presentation on the Event Calendar page in the IR section of our website at www.spectrumbrands.com. This document will remain there following our call. Starting with Slide 2 of the presentation. Our call will be led by David Maura, Chairman and Chief Executive Officer; Jeremy Smeltser, Chief Financial Officer; and Randy Lewis Chief Operating Officer. After their opening remarks, we will conduct the Q&A.

Turning to Slides 3 and 4. Our comments today include forward-looking statements, which are based upon management’s current expectations, projection and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated today July 31, 2020 and our most recent SEC filings and Spectrum Brands Holdings most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We assume no obligation to update any forward-looking statement.

Also, please note, we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today’s press release and 8-K filings, which are both available on our website in the Investor Relations section.

I will now turn the call over to David.

David Maura

Hey. Thank you, Kevin. Good morning, everybody. Thanks for joining us today for our third quarter call. Before we turn our attention to the company’s third quarter results, I want to say again thank you to all of our employees. We’ve got a 11,000 plus employees around the world.

And to all of our frontline workers in our factories and distribution centers. I’d like to say thank you. You guys are the true heroes of our company. Your sacrifices relevant Spectrum Brands do embrace our new identity as a true home essentials company.

Because of you we’re innovating marketing and we’re bringing joy and happiness to our consumers worldwide. Whether it’s in the kitchen, the yard, around the house, or with your pets; we are delighted to make life better and more enjoyable for our consumers of our product and services throughout the planet.

Turning to Slide 6. Our results this quarter reflected strong demand that accelerated throughout the course of the quarter. Simply put, we have embraced our position as a home essentials business and instead of pulling back in the face of the COVID-19 challenges, we are continuing our drive to add talent, create new innovative products and improve our operating model.

In addition, just in the last 60 days and ramping up in the current quarter, we have committed to significant increases in our advertising investments to meaningfully accelerate the long-term organic growth of our company.

The actions of our Spectrum brands family reflect resilience and operational excellence in this ever evolving environment. This includes adopting safety protocols in response to COVID-19, navigating temporary government mandated factory closes that has impacted our hardware home improvement businesses and balancing strong underlying demand including large mix shifts.

The temporary COVID-19 related supply disruptions from our HII division negatively impacted results this quarter. But we believe the situation is largely resolved and supplies expected to be called up by our first fiscal quarter.

Furthermore, our global productivity improvement plan savings positively impacted each of our core business in the third quarter. As we indicated earlier in the year, these savings are now beginning to outweigh the headwins from the annualization of tariffs which we expect to be an incremental $70 million in this fiscal year.

We continue to expect GPIP to generate at least a $100 million of full run rate cost savings over the next nine to 12 months. To be frank, I continue to be very excited about our global productivity improvement programs.

The impact of this critical strategic initiative is evidenced more and more everyday with our employees and increasingly more with our customers and investors.

The savings across procurement initiatives and operating model improvements are driving real benefits aiding our commitment to deliver sustainable organic growth by balancing these savings with reinvestments and allowing us to plant the necessary seeds back into our businesses to grow our biggest most promising brands.

And in fact, we are doing just that. As a home essential company, our products evolve, revolve and center around the home. Aided by our commercial operations team or what we call comm ops, we’ve quickly pivoted to ensure our new products and incremental advertising investments resonate with consumers finding themselves spending more time at the home.

Since the initial change in consumer behavior back in March, our comm ops and business units worked together as one. To recognize, adapt, and lean into the spike in at-home trends. That is positively impacting everyone of our businesses.

We believe this trend is a sustainable tailwind to drive growth and repeat purchases as consumers spend more time on the home front.

Starting in our home and garden division along with our home and personal care unit and expanding during the July 4th holiday across all the other business units, we have approved about $20 million of incremental advertising spend that will continue into the first half of 2021.

We expect these investments to drive returns from the George Foreman Smokeless Grill to the Spectrum side new homing, just to point out a couple. Again, instead of pulling back, the company is leaning in. We are investing and we are expanding.

From a balance sheet prespective, we continue to be focused on liquidity and a strong balance sheet. On June 30th, we strategically refinanced our existing $890 million cash revolver and we replaced it with a new five-year $600 million low revolver and a $300 million 10-year senior and secured notes which are due in 2030.

This leverage mutual transaction allowed us to maintain a very strong liquidity position while extending the maturity profile of our debt and locking in favorable pricing. Also during the quarter, we did opportunistically sell 1.1 million shares of our Energizer common stock holdings for proceeds of about $50 million and we ended the quarter with the 3.1 million share position in energizer.

If I could have you turn to Slide 7 now please. The third quarter results are represented three of our four business units during the third quarter actually generated healthy organic growth and despite COVID-19 related challenges, our global team generated financial performance that was consistent with the prior year.

Importantly, our ecommerce business continued to generate exceptional growth across all the businesses with sales up 44% compared to the prior year and now representing approximately 16% of our base business.

Total demand remain strong. With July, net sales up across all business units. Our future’s bright as a home essentials company, we believe we remain well-positioned financially and operationally to drive long-term sustainable organic growth.

Turning to Slide 8. I’d like to take just a few moments to look back or just over the past 90 days, did some comments from our last earnings call.

If you remember, I concluded my second quarter prepared remarks indicating our plans to realign our supply chain to better reflect and accommodate new demand patterns, plans to continue to execute on our global productivity improvement programs, and to embrace a more consumer driven mindset.

We delivered on those expectations in the third quarter by achieving better than expected results in the midst of a very challenging environment. Taking another step back, in the face of incremental tariffs in COVID-19 challenges, so far this year, we have grown organic sales and adjusted EBITDA despite significant supply chain issues.

While our teams are focused on finishing the year strong, our recent results demonstrate our resilience as a leading consumer staples company. We believe our laser focus on operational excellence driving efficiencies to our global productivity improvement plans and investing back in the business to drive long-term sustainable organic growth continues to point the way to a very bright future.

If I could have you turn to Slide 9 in the presentation. Our employees are the absolute heroes of the story. They continue to demonstrate serving leadership across the businesses and this includes our work to launch timely new products. The team is innovated by introducing Cutter hand sanitizer and more recently natures miracle disinfectant.

Our plans in Blacksburg, Virginia, Melle, Germany, continue to designate part of their facilities to produce hand sanitizer and help combat the spread of COVID-19. Given the continued needs, we continue to donate these products and so far we’ve donated to many organizations, some of which include the St. Louis Area Foodbank, the Northwest Arkansas Food Bank, and New York City Relief.

As well as many organizations around the country in the world. These products are also available now for purchase on several ecommerce sites. Turning our attention now to Slide 10, just as a reminder, our Spectrum 2020 guiding principles remain vision, clarity, and focus as we create a faster, smarter, stronger Spectrum brands of the future.

Our vision is being a strong innovator of great products supported by consumer insights and marketed with excellence. We are bringing clarity to organization by continuing to simplify our business, streamlining our go-to market strategies and becoming a much more productive and efficient company.

Our unwavering focus on best-in-class customer service, this is our pathway to consumer driven mindsets across the businesses and we accept nothing but outstanding quality and service for increasing innovation and marketing investments to drive our brand and the long-term growth of our businesses.

I continue to believe the best days are ahead of this company as we work to deliver significant long-term value creation to our shareholders and produce sustainable growth going forward. Now, you’ll hear much more from Jeremy on the financials and Randy will walk you through the additional business unit insights.

I’ll now turn the call over to Jeremy.

Jeremy Smeltser

Thanks, David. Good morning, everyone. Turning to Slide 12 and a review of Q3 results from continuing operations. Beginning with net sales. Net sale decreased 3.7% excluding the impact of a $11 million of unfavorable foreign exchange and acquisition sales of about $3 million.

Organic net sales decreased 2.9% with growth in Global Pet Care, Home & Personal Care and Home & Garden offset by a decline in Hardware & Home Improvement due to the supply challenges. Gross profit decreased $12 million in gross margin of 35.4% increased 10 basis points despite supply restrictions due to favorable product mix and improved productivity.

SG&A expense of $225 million decreased 3.4% at 22.8% of net sales consistent with last year driven by lower operating expenses and restructuring costs. Operating income growth of 1.9% was driven by lower restructuring activity partially offset by the supply disruptions in Hardware & Home Improvement.

Net income and diluted earnings per share were driven by gains on the company’s Energizer common stock holding, gain from the extinguishment of stainless-steel low debt and lower shares outstanding.

Adjusted diluted EPS increased 0.7% as favorable product mix, improved productivity and lower shares outstanding were partially offset by supply disruptions from HHI. Adjusted EBITDA decreased 4.9% and adjusted EBITDA margin decreased 20 basis points.

The deploy in HHI was partially offset by growth from Global Pet Care, Home & Personal Care and Home & Garden. In total, we estimated the overall impact of COVID-19 to our ability to supply product in the quarter, reduce net sales and adjusted EBITDA by over $100 million and $30 million respectively.

Turning now to Slide 13. Q3 interest expense from continuing operations at $36 million increased $2.2 million driven by higher debt from the revolver borrowings. Cash taxes during the quarter of $3.9 million or $3.7 million lower than last year.

Depreciation and amortization from continuing operations at $35 million was $1 million lower than the prior year. And separately, share and incentive based compensation decreased from $15.6 million last year to $14.2 million this year.

Cash payments for transactions were $7.2 million down from a $11.8 million last year. And restructuring innovative payments for Q3 were $25.2 million versus $14.6 million last year. The higher cash burn was driven by GPIP.

Moving to the balance sheet, we completed the quarter by building meaningful financial flexibility and a strong balance sheet including sequentially improving our liquidity position and maintaining ample flexibility on debt covenants.

We had over $800 million of total liquidity including a cash balance of $466 million and $341 million available on our cash flow revolver. Total debt outstanding was $2.7 billion and up as a result of drawing down on our revolver.

As compared to the prior year, third quarter ending inventory was lower by $151 million. As enhanced demand and supply delays associated with COVID-19 combined with the increased disappointment and approved process around inventory management we demonstrated in the past three quarters limited our inventory investment.

We continue to invest in capacity, automation and consumer insights to better manage our working capital and are really pleased with the progress this year. On June 30th, we successfully refinanced our $890 million cash flow revolver with a new five year $600 million cash flow revolver and $300 million of 5.6% senior unsecured notes June 2030.

Consistent with our comment last quarter based on the seasonality of our working capital we generated substantial positive cash flow in the third quarter and we continue to expect substantial positive cash flow in Q4.

Additionally, we sold approximately 1 million shares of Energizers stock for proceeds of $50 million during the quarter and held just under $3.1 million shares at quarter end. Capital expenditures were $12.8 million in the quarter versus $13.2 million last year.

Turning now to Slide 14 in our plans moving forward, while we have withdrawn our fiscal 2020 guidance, we did want to spend time discussing our current market conditions. We believe our strong liquidity which was further solidified in June positioned us to weather the storm and the pandemic.

Regarding our capital strategy, we continue to target net leverage of 3.5 to 4.0 times. We improved this metrics sequentially as we ended Q3 with net leverage of just below four times and expecting yet to end the fiscal year at the midpoint of our target range.

Additionally we continue to temporarily suspend our share repurchase program. As mentioned earlier, we are also planning for incremental advertising investments in Q4 and beyond and Randy plans to provide more details by business unit.

And lastly, demand in July remains strong and net sales up across all business units. Now to Randy for a more detailed look at our operations.

Randy Lewis

Thanks Jeremy, and good morning. Thank you all for joining us today. My comments will focus on our operational performance in Q3 progress on our global productivity improvement plan and a review of each business unit to provide you more detail on underlying performance drivers.

In Q3, we continue to face COVID-19 related challenges namely supply disruptions that threatened our ability to with the increased demand from our customers for our home essential products.

I will detail this by business unit in a minute but first the safety of our teams has been our paramount concern for this quarter as we responded to the COVID-19 impacts on our supply chains globally.

Then the challenges were varied throughout the different regions of the world, we have greatly benefitted from a global governance approach of our COVID-19 response team that ensured solid implementation and options strict safety standards and protect our people and minimize chance of COVID-19 spread within our facilities while ensuring that we abide by all government mandates.

We saw similar challenges to what we faced in Q2, however the operating environment improved the cost each of the business units throughout the quarter. Production rates have improved sequentially over the past few months and today, all of our manufacturing distribution facilities worldwide are open and operating at or above the output levels from before the pandemic.

And we are working deligently to replenish inventory since 80 stocks. Which is really critical because we have a very strong order book in each of our businesses. Let’s dive into the key three supply chain performance of each business unit and kind of and cover the expectations moving forward.

And HHI recalled a starting at the end of March government shutdowns and reduce capacity mandates related to COVID-19 impacted two of our plants in Mexico and one in the Philippines. These government mandates continued into late May and limited our production capabilities.

Now as a result clearly impacted our security category sales in Q3. In response to these disruptions, our team successfully ramped up production at third party partners and moved work to other internal manufacturing locations where possible.

However these efforts were not quite enough to offset the impact of the temporary shutdowns. We got news since after receiving the green lights to reopen each of our facilities from these governments or teams have now increased capacity back to pre-COVID-19 levels or above. And we continue to push for further increases in capacity in these plants and are using an alternative locations to help accelerate our recovery.

As you may recall, earlier this year in Q2, we had a few cases of COVID-19 among employees that are at Home & Garden facility in St. Louis. We took swift action to mitigate potential spread. After temporarily shutting down, clean the facility reviewing safety measures, we reopened successfully.

Since then, we have redesigned production processes to adopt new staffing conditions that enhance worker safety. The facility has fully recovered to pre-COVID-19 output rates, is running hard to address consumer demand and retail orders reflecting strong POS levels at an extended selling season.

But on the personal care after both sales started in April, we rebounded with very strong stronger than expected demand starting midway through the quarter. This positively impacted sales and low order supply levels which were already strengthened the shutdown of Chinese suppliers in Q2.

We expect inventories of our finished goods to return to more normal levels across most of our categories by the end of Q4. Turning to Slide 17. As you heard in my supply chain review, we continue to benefit from stronger consumer demand for our home essential products.

As a company, we believe we are gaining share across most of our major categories. As David highlighted earlier, our commercial teams continue to adapt to the shift in consumer environment by prioritizing our marketing efforts to our best performing brands and well stocked products.

Tying the benefits to home life and enabling consumers to purchase them online. As a result, demand in topline accelerated across each business unit with all that HHI generating solid organic growth.

Demand remain strong so far also in Q4, then while we still have two months to go, we expect strong orders as our recovering supply chains replenish low inventories at many of our retail partners.

Initially, our digital teams continue to leverage current data to identify consumer trends for new products and sales opportunities which read promotional content that appeals to these consumers. This quarter, ecommerce grew by more than 44% a further acceleration from the 38% reported in Q2.

Ecommerce this quarter represented more than 16% of our total net sales as a company.

Now, let’s turn to our internal growth and efficiency efforts on Slide 18. While I can provide an update on our global productivity improvement plan. As a reminder, the most important aspect of this program is to drive sustainable growth in our products and brands to new capabilities and increased investments in consumer insights, R&D and marketing.

To drive that investment, we are changing to operate more efficiently and capture cost savings by harnessing our collective knowledge, power and resources in key areas that are shown here. This program continues to be our most important strategic initiative to transform into the new Spectrum Brands.

In the COVID-19 challenge has accelerated our progress especially in our company culture. Our teams laid the foundation over the past year for partnership and collaboration across the enterprise but the COVID-19 pandemic required us to work those partnerships more quickly and effectively across business units, regions and functions.

This cultural acceleration will facilitate the delivery of long-term sustainable organic growth. As we continue to focus more globally online strategies and faster decision making. As David mentioned earlier, savings from our GPIP program positively impacted each business unit during the quarter.

And we continue to expect the gross savings to be at least a $100 million annually and that these savings will be a full run rate within the next nine to 12 months. Much of the savings continues to be invested at the back end of growth initiatives and consumer insights, R&D and marketing across each of the businesses.

Now let’s turn to a more detail on performance of each of the four business units. Starting with HHI on Slide 19. Third quarter reported net sales decreased 20.6% and organic net sales decreased 20.4%. adjusted EBITDA decreased 35.6% primarily driven by negative volumes and incremental cost related to COVID-19 operating conditions.

Customer demand each of the three categories remained strong and we expect a significant improvement in shipments given our order position and improving factory outputs as we progress through Q4. As we highlighted on the Q2 call, April demand reflected certain areas of snowing particularly new home construction.

But since in the macroeconomic environment improved in May and June and we expect this sequential improvement to continue into the end of the year, albeit still down a bit from prior year. Additionally, we expect to repair new model market to benefit from consumers continuing to focus on DIY projects.

Looking ahead into Q4, we expect net sales to primarily benefit from the reduction of high open orders. As we work to resolve the supply chain constraints from the third quarter related to the temporary order shutdowns.

We also expect demand in Q4 and beyond to benefit from our new product introductions and incremental advertising investments. This includes the exciting retail launch of Halo Touch, our innovative biometric Wi-Fi enabled smartwatch and was awarded Best of CES in January this year.

In addition to the smart key technology in voice assistance capability, Halo Touch not only offers home owners and their family are safely and have a safety lock and unlock their doors from any remote location with the internet connection but also offers the enhanced at-door experience of the innovated fingerprint access technology continually allowing enrollment about the 50 users which can be securely manage from the Kwikset app.

Additionally, we’ve already invested in incremental advertising dollars to the Kwikset and Pfister brands. In the case of Kwikset, new TV commercials which we haven’t seen in over 10 years, again running around the July 4th holiday with a focus on our Microban products which incorporates anti-microbial technology into the coding that lasts the lifetime of the lock and result in a bacteria reduction of over 99.9% versus an untreated lock.

These incremental advertising investments are planned to continue in the 2021 and initial indications are encouraging with 10s of millions of early impression soon through consumer awareness of this capability.

Now the Home & Personal Care which is Slide 20. Reported in organic net sales increased 3.0% and 6.5% respectively. Adjusted EBITDA improved 37.4% to $25 million. Net sales were driven by strong grown in small appliances partially offset by a moderate decline in personal care connecting with COVID-19 related inventory constraints.

North American sales in particular grew 14% in small appliances driven by mass online and discount channels. Unit growth was driven by higher volumes mix favorability, productivity improvements partially offset by foreign exchange headwinds.

Strong growth in the U.S., Canada and Asia Pacific and continued growth in Europe reflect the broad base turnaround momentum of our Home & Personal Care business. Behind the new management team globally aligned strategies and increased investments.

This quarter represented the fourth consecutive quarter of year-on-year topline growth and third consecutive quarter of year-over-year bottomline growth. Teams targeted approach for both home appliances and personal care driving market share gains and helping consumers with at home meal prep and personal grooming needs and today’s COVID-19 environment.

Our team sees growth opportunities across cooking, food preparation, breakfast preparation as well as growth from shaving room in Q3. And this momentum continues so far in Q4. Incremental advertising investment in Q3 was focused on promoting the new George Foreman Smokeless Contact Grill which is already launched at Walmart.

Which enables convenient and healthier meal preparation without the mess and smoke from stove top cooking. All indications are promising and in Q4 we plan to extend these investments for our George Foreman Smokeless Grill series which will expand distribution both additional models and channels.

We’ll ask the plan to invest behinds an exciting innovations in our Remington brand. In Europe, in Asia Pacific, we will be promoting our new hydrolex series which allows consumers to achieve expert results without any heat damage.

In the America’s, we will focus on our new wet to style launch which allows consumers to save time by effectively drying and styling their hair in a single step. Our focus on fewer bigger and better products in this business unit are paying dividends and we expect these investments to continue generating returns into the critical holiday period.

Moving to Global Pet Care, which is Slide 21. Third quarter results represented a record quarter for revenue and profit was reported net in organic sales growth of 8.9% and 8.3% respectively. And adjusted EBITDA increased 29.7%.

Growth in companion animal was broad based while double-digit growth in aquatics was driven by a surge in Goldfish branded live fish sales along with very strong demand for aquatic and reptile environments and systems.

Higher EBITDA was driven by volume growth, productivity improvements and positive pricing partially offset by higher tariff cost. Q3 represented nominally a record quarter but the second seventh consecutive quarter of year-over-year topline growth and fifth consecutive quarter of bottom line growth despite lacking difficult double digit comparisons to the prior year.

Our pet care team continues to build on our global market leadership position in our core categories of the products dogs use pet grooming, and pet stain and odor. In addition to the already strong fundamentals of this business, we are specially encouraged by all the new pet parents who have recently entered the companion animal category.

And all the new hobby is to recently enter the aquatics and reptile categories. These are long-term commitments in both well for the future demand of our products. Lastly the Tetra team began the integration of the Omega Sea acquisition this quarter within our existing aquatics business.

This touch neck position is highly complementary to our existing portfolio with untapped global growth opportunities is already performing well despite the COVID-19 challenges to the independent pet channels early in Q3.

And finally Home & Garden which is Slide 22. Third quarter reported net sales increased 4% and adjusted EBITDA increased 4.1%. Strong POS in the quarter was driven by distribution games, new product introductions, category growth and favorable weather patterns.

Net sales grew despite COVID-19 related supply chain disruptions. Addressing these disruptions, we improved production upwards sequentially and worked diligently to the field of strong demand while maintaining our focus on employee safety.

Even the increase was primarily driven by volume growth, pricing, favorable mix and productivity improvements despite headwinds from prior manufacturing cost and tariff costs and our decision to significantly increase our investment and advertising in the quarter.

In the third quarter, which user represents about half of sales and EBITDA for the year generated growth across each of the three categories in the Home & Garden business. Our largest brands all delivered strong performances, consumers spend more time at home and we experienced favorable weather patterns.

Additionally we did and we will continue to invest more advertising dollars to tell our story around Spectracide, Cutter and Hot Shot. POS remains strong in July with our key retailers indicating plans to continue those seasonal support of the category through the at least the end of our fiscal year.

The fundamentals of this business remain strong, we saw the profitability in high various to interim. We are confident that our strong bring into equities and our increased investments in product development and marketing will continue to accelerate long-term growth rates.

In my section, I wanted to acknowledge another great quarter of progress on our operating culture and our strategic initiatives. And to thank our 11,000 plus employees for all they are doing to make us proud to be team Spectrum.

Now, back to David.

David Maura

Hey thanks, Randy, Jeremy and everybody for joining us today. Given that we covered quite a bit on today’s call, I’d like to just conclude with a few takeaways on Slide 24, I think it is. First, we believe our results for the quarter and the year reflect resilient and operational excellence.

Second, the future of Spectrum Brands is bright with a strong demand outlook and plans to further strengthen our balance sheet and net leverage position as we invest to drive growth. Third, demand for our products accelerated across each business unit during the third quarter as we grew organic sales across most business units, the demand remain strong so far in the fourth quarter.

Fourth, while our supply chain was challenged in Q3, we expect output and fulfilment rates to materially improve in the company’s fourth quarter. We believe we are well positioned financially and operationally to weather the storm.

And we will be continue to be laser focused on our employees, our consumers and our shareholders over the long-term. We want to thank you for your time, your continued support and we wish you health and wellness as we go forward.

I’ll turn the call back to Kevin. I really appreciate it when joining us today.

Kevin Kim

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

Question-and-Answer Session

Operator

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

Nik Modi

Yes. good morning, everyone. And today a couple of questions. first is just David just thinking about category growth rates and I know obviously you’re not giving guidance but how are you just thinking about philosophically,

What were category growth rates obviously prior to the whole situation. And how do you think that’s going to roll going forward just it’s pretty clear and I think that it’s pretty surprising how well the business has fell backwards, take credits at much more defensive portfolio.

And a lot of consumer products companies has that in the staple space, are probably going to see elevated levels of consumption as we move forward, even past the pandemic, well. I’m just trying to get your perspective around that particular dynamic.

And then just a second just quick question is the HHI side, did you lose share if I know the leading competitor also had issues with productions. I just wanted to understand kind of what happened from a competitive standpoint around the added stocks.

David Maura

Well, let’s take in a rush order. Thanks for your question, Nik. It’s good to hear from you, you sound well. So, that’s good. Look, on HHI, I think quite frankly on price Pfister, our plumbing section, I think we’re holding around and in fact we’ve got some new business coming online here and so I would expect this to be able to grow here.

We definitely grew share on our hardware segment and we believe we are continue to win there. On security, which is our biggest unit, no question, with supply disruptions and basically just the inability to get new products, your vertical integration because of mandatory closures in certain countries. We did suffer on an absolute basis but I would tell you I believe we’re holding our own.

And hopefully when we talk in 90 days, we’ll be able to talk about taking share. We’re really through the global productivity improvement programs. Again let me back out. I just the employees of this company are really rising to the challenge, Nik.

I mean, what’s going on here is we’re turning the culture and people are really embracing the fact that we’re not just making goods and services in and around the home and for patch and clean up your yard. But yes, but most people out there are going through a tough time and we all are.

And some of these global calls that are been now with our team has really asked everyone to embrace the stock that we’re not just providing good new services, we’re helping make people’s lives better, up and enjoy their pets, get the yards clean of weeds and bugs, secure their premises with the lock.

So, I just feel an energy in the company right now. We’re working for a bigger purpose. And so with the global productivity improvement investments in innovation new products and now the marketing ramping up is kind of tell the story.

The team here around the table with me in Middleton, Wisconsin, they are really trying to position our business to take here. So, I’m I will tell you we’re holding serve to taking sure in most businesses. What I think you’ll see if you really feel the onion back is when we had supply constraints, we focused on our top brand.

So, where we — we want to play to our strengths. And so, mix is helping quite a bit this quarter because we do put money and emphasis behind, getting Spectracide, Cutter, Repel, Kwikset, DreamBone, SmartBone, our big brands, you know Russell Hobbs.

Russell Hobbs is doing terrific by the way in the U.K. So, we really want to get our big brand equities out there tell the story and see sheer growth. So, we’re making progress. In terms of growth rates, I don’t want to kind of — I would cause that maybe we were kind of a 2% or 3% or kind of category growth and clearly we’re seeing elevated levels so that but we do see this as a sustainable tailwind for the foreseeable future.

Nik Modi

Great. Thanks, I’ll pass it on.

David Maura

Right, Nik.

Operator

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

Faiza Alwy

Yes, hi good morning everyone.

David Maura

Good morning, Faiza.

Faiza Alwy

And so yes, my first question is around then economic environment. And I think the only business where I’m wondering how cyclical that business might be and how dependent might be on the macro environment as the HHI business.

So, David I’d love your perspective in terms of how your thinking about that business to the extent there is economic uncertainty?

David Maura

Well, I think with 33% GDP declines, we’ve got plenty of uncertain economic activity and we expect HHI to grow in this current quarter. 75% of that business is replacement in your reparable model type business. And we have the largest install base in the United States of America.

We continue to be the market share leader. And yes, I mean, I’d look — again I would ask you all to back up, go back six to nine months, this is a company that entered this fiscal year with a challenge to offset $70 million of tariffs.

That was the baseline. And you saw the growth we did in the second quarter, I think we grew sales 4%. Last quarter we grew EBIT over 20% in the second quarter, that was the March quarter. And then, our both for lack of a better not a forethought into the COVID-19 storm.

And I think again they’re often not — all credit to the team. It’s been all hands on deck, everyone’s paddling real hard. But I think we’re navigating the economic uncertainty in the COVID-19 environment very well.

And again, that’s why my opening remarks are kind of I really want to call your attention to all our frontline workers and our factories and distribution centers around the globe. They’re just doing a remarkable job.

So I, again I think you should take some solace in my comment that I expect HHI to grow in Q4 and that’s because we restored our supply chain. Demand remains excellent.

Jeremy Smeltser

I think David too, I’d also add. There are some different things happening as it relates to housing trends and just the economic number that you’re seeing, right. There is very low inventory around the country.

Home deliver [indiscernible]. A lot of people are trying to flee, multi-family units to get to their own homes. And right now that’s looking like good health and start indicators which is good for the 25% of our HHI business that’s exposed to that new home starts.

Faiza Alwy

Okay, that’s really helpful. Just I guess my second question is you only have two months left in the year. And it seems like you have a lot of catchup to do in terms of inventory and open orders and HHI. So, I’m curious about your thought process with regard to there you’re not providing specific guidance for.

Those last remaining quarter, even if it’s a wide range. So, I guess where do you see the most level of uncertainty just over the next couple of months?

Jeremy Smeltser

Yes, I think it’s a fair question. I think the way I haven’t think about it though is obviously in many states here in the U.S. and also in some of the country’s we operate in that there are still a lot of new cases rising and there’s a potential for additional shutdowns.

And so, while that’s not impacting POS for us at this point because they remain strong, the reality is our ability to fill those orders could be temporarily impacted still if further closures were to hit us.

And so, we just want to be cautious as it relates providing that financial guidance but obviously we’re giving you the trend through July.

Faiza Alwy

Okay, thank you.

Jeremy Smeltser

Thank you.

Operator

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

Bob Labick

Good morning, congratulations on strong operating performance.

David Maura

Thanks, Bob.

Jeremy Smeltser

Thanks, Bob.

Bob Labick

I’m in particular I think the margin expansion was really impressive. You talked a little bit about it and particularly in Pet and HPC. So, maybe you could talk a little more about the drivers for margin expansion.

And if those levels sometimes in record levels are sustainable or where they should kind of settle out, how we should think about margins in those categories going forward.

Randy Lewis

So Bob, this is Randy. I’ll let Jeremy jump in with some more specifics that with regards to Pet, we I think we’ve been talking to you guys for about four quarters now about kind of where they were in the turnaround cycle that business and starting to get seen from the initiatives we put in place a couple of years ago as we started globalizing that business.

So, we’ve done a lot of world to simplify and focus on the core. We’ve done a lot of work with streamlining supply chains, exiting and closing excess capacity. Lots of work there that while I’m not saying the record level is definitely going to continue at that rate.

This is not something was not expected for us. We continue to see one way ahead of us in that business. And that’s a business that but all of them are benefiting very well from our initiatives in our Pet program.

HPC’s a very similar situation. There was a couple million dollars this quarter related to a tariff catch up that there’s a onetime benefit that’s slowing through. But for the most part again, we’re about 18 months into a new management team with a new global strategy, new operating model.

And that’s about that amount of time it takes to create new products and make meaningful supply chain changes. So, we’re excited about what’s going to continue to happen on that margin expansion in both of those specifics.

Jeremy Smeltser

Yes, I think Bob, I just add over time, I mean, we do think there’s margin opportunity that the GPIP program thus far a lot of the saving have gone to offset the $70 million or so in tariffs this year and $50 million or so last year that David had talked about.

But we see opportunity as we move forward. And we’re also as David mentioned, investing a 100 basis points worth of margin or 50 basis point worth of margin incremental in A&P which we expect to drive organic growth in the future which again should fall the bottom line nicely.

Bob Labick

Got it, that’s great. And that kind segregates right into my next question which really is. And maybe talk about a little increments maybe more is it based on advertising.

But the question was how are you positioning the businesses to drive the incremental sales and continue to gain share and make this more recurring particularly for HPC beyond the initial kind of stay at home pop that you get, that you may have got.

So, like what’s the opportunity set in front of you and how do you view this incremental advertising to continue to drive recurring purchases.

David Maura

It’s Dave. At the end of the day, right, we just — we have tremendous products and we — our innovation pipeline is strong. We’ve got a lot of new products coming out. The history of the Company was pretty much an M&A strategy driven by me up until recently we pivoted to organic growth and really investing behind the business. And so right now we think we have a phenomenal opportunity. We just launched Cutter hand sanitizer. We never had hand sanitizer before.

Obviously we’re trying to do the best we can to help our employees, frontline workers, people in our hospitals around the country, but also our customers now with our e-commerce offering. And so why not take that opportunity to really advertise the product. Let people know that the Cutter — the unaided Cutter brand awareness, we want to spike it. We want people to understand that not only we do hand sanitizer, but Cutter’s efficacy in terms of protecting you from mosquitoes and other things is fantastic. And so we really want to build share. And we’re doing the same thing with the Spectracide, YOU HOLD THE POWER campaigns that you see, Kwikset, we’ve got SmartKey technology that lets you change your key 30 seconds or loss. We just get to tell the story better.

And so we got Microban now. So, geez, it’s COVID-19 we’re all sitting here, I mean I’m sitting here in a room with the guys and I’ve got my Cutter hand sanitizer. We keep spraying our hands, like, what, it’s going out of style. Well, wouldn’t you feel better if you had Microban on every door knob of your house. It kills 99.9% of germs. Isn’t that a great segue to market that, convey that story and convert people to the halo effect of Kwikset which oh, yes, by the way, we just launched this biometric lock called Halo and we’re really front and center with the whole digital lock campaign. So I just think Spectrum has a phenomenal opportunity to actually convey the message to take share and make it more permanent.

God willing, we can get out of this COVID-19 mess as soon as possible. But I agree with your point. I think we can tell our story, take share, have a bigger portion of the shelf and continue to follow that with innovative products that become recurring revenue streams.

Bob Labick

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

Operator

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

Ian Zaffino

Hi. Thank you very much. Guys, good to see how well the e-commerce business is growing. Can you maybe give us a little bit more color there? Maybe, like what divisions are doing best there? How is their share doing online? And then maybe, like what channels of online is it more specialty versus general e-commerce? Any kind of color you could give there would be great. Thanks.

David Maura

I’m going to let Randy address it. In terms of breaking it out by segment, there’s certain competitive data. We’re not going to want to peel the onion so deep. But I’ll let Randy take a swag at kind of giving you some broad strokes there. But you’re not wrong. We are seeing tremendous growth in e-com and we’re seeing acceleration.

Randy, you want to take a stab?

Randy Lewis

Yes. So what I can tell you is that in the quarter the business units had performed the strongest in year-on-year growth and the conversion there was our appliance business and our Home & Garden business. And that move in the appliance business is quite encouraging to us because a year and a half ago that was an area where we felt like we were really losing ground. And so we’ve put a very specific focus with a brand new team over the last 12 months and that’s really starting to pay dividends. And it’s part of our comm ops organization.

So we’ve centralized our e-commerce operations across all four businesses to ensure that we’re applying best practices there.

So those two businesses have done the best. Pet, again, very strong. HHI, a little slow this particular quarter just mainly because of supply constraints. And then the other thing I would tell you is — that might be helpful is that North America grew at a little faster pace than Europe although Europe was still very strong.

Ian Zaffino

Okay. Thank you very much.

Operator

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

Olivia Tong

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

David Maura

Hi, Olivia.

Olivia Tong

How are you?

David Maura

We’re doing well. Glad you are as well.

Olivia Tong

Great. Thanks. First question for me is just if you could unpack the lost COVID-related sales and profit, the $100 million sales and $30 million profit, a little bit, because obviously those are pretty big numbers and the margin implication is quite high. So how much of that do you think you can get back, particularly like you think about HHI it sounds like you feel pretty good about the next couple of quarters. But then Home & Garden, obviously, there’s some supply chain issue there. Are those sales now like lost because of seasonal category or is there actually some catch-up that you could potentially do in that category as well?

Randy Lewis

So good morning, Olivia. It’s Randy. I would say it’s a mixed bag depending upon the different businesses. And so in Home & Garden, obviously the seasonality, we’re running toward the tail end of the season. But we continue to see strong demand there. We are running all out in the supply chain and we’re headed into the month of August. That’s a very, very unusual thing for us.

So inventories are relatively low. I’m sure we’ve missed some consumer takeaway over the course of the season.

But the main thing for us is ensuring that we are doing the right things for the health of the business. And so we feel good about the fact that we’re setting up that business to be very strong for next year. So line reviews are going well. Relationships with retailers are going well. Our investment is growing our top brands. And so we will likely see some consumer takeaway that can’t be recovered.

In HHI which was the biggest chunk of the impact in the quarter, we had a growth on our backlog of almost $40 million over the course of the quarter. So that’s just the delta between the orders in queue at the beginning of the quarter and orders in queue at the end of the quarter. So those can clearly be picked up.

We also think that as the supply chain continues to replenish supply there is a fair amount of retailer inventory that will continue to catch up. But I want to caution you that as we said in the prepared remarks, we probably won’t be fully caught up on that business until we get into the early part of Q1.

Olivia Tong

Got it. That’s helpful. And then two related questions. First you guys talked about how you had sold off some of your Energizer shares. If you could just talk about kind of your future plans for what’s remaining of that slug? And then strong quarter, good outlook, good indication in terms of some of the bits that you gave us. But it sounds like on share repurchase, it’s still kind of taking a backseat on that. So obviously you guys were fairly aggressive pre-pandemic. So can you talk about what you need to see to get comfortable to reinstate the buyback? Is it wait until you get to the midpoint of your leverage range at the end of the year, below that? Just if you could talk through that, it would be great. Thank you.

David Maura

Yes, I mean on the Energizer stake, it’s just opportunistic. Obviously, March and April were periods of significant financial stress in the markets and in conjunction with kind of getting a new cash flow revolver and terming out some debt, it’s leverage neutral, but it’s nice to have a lot of runway. I think that was just a good liability management. And so as we look forward, quite frankly, listen, I — we were aggressive on the repurchases early in the year. This was the year we were going to really deliver quite well in my opinion from the start of the year and we didn’t have COVID-19 in the plan.

And so obviously we backed off of repurchasing shares to kind of maximize liquidity and protect the balance sheet. I think that if you look at our peer group, our stock remains significantly undervalued. We would like to return to repurchasing. I personally would like to see EBITDA start to grow here and the leverage ratio tipped down. But we believe relative to our comp set, we are very attractive from a valuation standpoint, both on a total enterprise value to EBITDA basis and on a free cash flow yield basis. I think people if they do the math will figure out we are double digit free cash flow yield company with an improving outlook.

Olivia Tong

Thanks guys. Be well.

David Maura

Thank you, Olivia. You as well.

Operator

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

Jim Chartier

Hi. Thanks for taking my question.

David Maura

Sure. Good morning.

Jim Chartier

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

Randy Lewis

Yes. So, Jim, this is Randy. I would tell you our marketing spend has been relatively flat and relatively low compared to peer sets for up until this year. And so we had planned on incremental spending this year and David’s $20 million incremental is beyond that. That’s a number that exceeds just the balance of this fiscal year. But without getting into actual data, we still have a ways to go. We believe we’re still well on the positive side of the ROI curve there. And we’ll be looking to continue those investments. We’ve been very consistent that we feel like the key to strategic growth, organic growth is insights, innovation against those insights, advertising against those innovations. And so that’s the recipe across the totality of the enterprise and we’re just now kind of getting started.

David Maura

And just to give a little bit of specifics, Jim, so historically the last couple of years, we’ve been kind of just under 1% of sales. The incremental $20 million that David talked about, we will spend around half of that this fiscal year and around half of it in the first half of next fiscal year. But we do expect this year’s spend to get over the 1% of sales mark. And I would say the categories kind of vary as you look at peer group sets and some of the data is difficult to get. But there is probably still some runway for increased spending as we go forward and show success and return on that investment.

Jim Chartier

Great. And then, Randy, how impactful were kind of COVID related incremental costs in your manufacturing or other facilities? And then are you now kind of finding ways to reduce those maybe going forward or maybe pass them on to customers with some pricing? Thanks.

Randy Lewis

Great question, Jim. We’re not at the point where I think those costs passing on are part of our discussions with our customers. But they’ve been relatively controlled. HHI has had a fair amount because of just the extent to which we had shutdowns. But for the most part we’ve been able to find offsetting efficiencies and productivity. So those are not going to be material pieces to us going forward in the next year.

Jeremy Smeltser

I think that’s right. I’d also add, like a lot of companies, our travel — our T&E costs are down quite a bit in the face of COVID-19. That’s another thing to think about as you think about a more normalized environment, potentially and hopefully for next fiscal year.

Operator

Our final question comes from the line of William Reuter with Bank of America.

William Reuter

The last couple of calls, it sounds like M&A has not been particularly active. Are you going to be investing more in advertising because it sounds like that’s where you see the most opportunity right now. Are you seeing M&A opportunities right now and given the pretty strong demand for all your products, are you guys looking to be active there?

David Maura

Yes, I mean the Company definitely took a break from M&A for a while. We want to get our organic growth rate up. Global Productivity Improvement was a very large enterprise wide program and that’s still ongoing. So the work that’s been done here over the last 18, 24 months is really getting our house in order, really supporting our hero brands, our largest categories and really trying to take share.

So we’re still — that’s the number one priority, is organic growth rate and sustainable free cash flow going forward. But we did do a tuck-in acquisition in our aquatics business. And so we’re open for business there. Never say never to anything large. But I think generally speaking, March, April even into May the M&A markets were pretty frozen. We definitely see them loosening up here. But — again, our focus is driving shareholder value. We want to get the leverage back down. We want to get EBITDA growing again and we think we’re on that trajectory right now. So stay tuned.

William Reuter

All right. And then just as a follow-up, it’s always hard to gauge the size of some of the new products, but it sounds, given the amount of time, you guys have spent talking about on this call, like it may be a greater revenue opportunity than maybe you’ve had in several years. I guess, one is that the case that the new innovation is a greater opportunity? And then two, do you feel like this $20 million of advertising that you’re going to be spending, will that be paid for immediately in terms of sales or do you think that this is more brand building and will be paid for over time?

David Maura

I think — I look at advertising as typically like you’ve got to be involved in it for a three-year kind of payback, which is not a long period of time, if you think about it. But if you just — if we just take a simple example, we started turning the ad dollars on just months ago on the George Foreman Smokeless Grill. And that business had been kind of flat into a decline for a decade. And we’re just seeing POS through the roof, not just because of COVID, we’re taking a lot of markets share.

Our dollar market share in grills is up double digit. And so we do believe we’re seeing a very quick return on our ad dollars. But we are prepared to build that into the model going forward. And what we’ve done is, we’re using the savings generated by our Global Productivity Improvement Plan to pay that bill so that we can actually drop the incremental revenue and the contribution margin back to our shareholders. And we’re in that inflection point, Q2, Q3, we would have preferred not been interrupted by COVID-19 on supply chain side. But we are seeing very fast payback.

And yes, I think you’re right, I think we have tremendous opportunity to grow Kwikset, Pfister, Spectracide, Cutter, all of our big brands have tremendous growth potential. And we see that — we see that even now with DreamBone, SmartBone. There’s a lot of growth under the surface. And we want to demonstrate that to our –to the investment community over the next quarters and years.

William Reuter

Great. That’s all from me. Thank you.

Operator

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

David Maura

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

Operator

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





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Fiat Earnings Beat, Revenue Misses In Q2 By Investing.com


© Reuters. Fiat Earnings Beat, Revenue Misses In Q2

Investing.com – Fiat reported on Friday second quarter that beat analysts’ forecasts and revenue that fell short of expectations.

Fiat announced earnings per share of €-0.65 on revenue of €11.71B. Analysts polled by Investing.com anticipated EPS of €-1.21 on revenue of €13.94B.

Fiat shares are down 34.67% from the beginning of the year , still down 41.68% from its 52 week high of €14.78 set on November 4, 2019. They are under-performing the which is down 14.31% from the start of the year.

Fiat follows other major Consumer Cyclical sector earnings this month

Fiat’s report follows an earnings missed by Moncler SpA on July 26, who reported EPS of €0.17 on revenue of €93.2M, compared to forecasts EPS of €0.2 on revenue of €95.13M.

Freni Brembo had missed expectations on Wednesday with second quarter EPS of €-0.03 on revenue of €375.2M, compared to forecast for EPS of €-0.02 on revenue of €399M.

Stay up-to-date on all of the upcoming earnings reports by visiting Investing.com’s earnings calendar

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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