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Spectrum Brands Holdings Inc (NYSE:SPB)
Q3 2019 Earnings Call
Aug 7, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2019 Third Quarter Earnings Conference Call.

[Operator Instructions]

I would now like to introduce Mr. David Prichard with Spectrum Brands. Mr. Prichard, you may begin your conference.

David A. Prichard -- Experienced Investor Relations, Corporate Communications, Marketing and PR Professional

Thank you, operator, and welcome to Spectrum Brands Holdings Fiscal 2019 Third Quarter Earnings Conference Call and Webcast. I'm David Prichard, Vice President of Investor Relations for Spectrum Brands and your moderator for our call today. Now 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 spectrumbrands.com. This document will remain there following our call. So if we look at the presentation and we start with slide two, you'll see that the call will again be led by David Maura, our Chairman and Chief Executive Officer; and Doug Martin, our Chief Financial Officer.

David and Doug will deliver opening remarks, and then we will conduct the Q&A session. If we turn to slides three and four, you'll note that our comments today include forward-looking statements, including our outlook for fiscal 2019 and beyond. Now these statements are based upon management's current expectations, projections and assumptions and are by nature, uncertain.

Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated August 7, 2019, and our most recent SEC filings and Spectrum Brands Holdings' most recent 10-Qs and 10-K. We assume no obligation to update any forward-looking statement. Also, please note that we will discuss certain non-GAAP financial measures in this call. Reconciliations on a GAAP basis for these measures are included in today's press release and 8-K filing, which are both available on our website in the Investor Relations section.

So with that, I will now turn the call over to our Chairman and CEO, David Maura.

David M. Maura -- Executive Chairman and Chief Executive Officer

Thank you, Dave, and just want to thank everyone for joining us this morning. As our fiscal 2019 draws to a close, I'm very proud of our associates here at Spectrum Brands as we are on pace to deliver the financial commitments we set about a year ago, and all of this despite headwind from tariffs, unfavorable weather in Home & Garden, distribution input cost increases across our business lines.

Spectrum employees have risen to the challenge, and they're delivering on our goal of a year of stabilizing our businesses, solidifying our platform and positioning our company to resume growth in 2020. We have also materially improved our capital structure from a peak leverage ratio of 5.8x in December of '18, to an estimated net leverage of 3.5x or better as we exit this year -- fiscal year. We expect to be in a very strong financial position with over $500 million of cash and full availability under our $800 million revolver. Additionally, during the fiscal year so far, we repurchased over $250 million of our shares, leaving us with $750 million remaining under our buyback authorization plan. We continue to believe the opportunistic acquisition of our shares represents a high return on our capital.

So far, during fiscal '19, including our recently declared dividend, we have committed to return over $330 million of cash to our shareholders through share buybacks and dividends. On our second quarter call, we indicated we had undertaken a global analysis of our operating model and the objective was to identify potential performance improvements. During the third quarter, we have moved from analysis into detailed planning, and we've actually started the initial execution of what I'm calling our Global Productivity Improvement Plan.

As we prepare to enter 2020, I'm actually thrilled that the teams are embracing our plan, which is expected to materially and permanently increase the operating efficiency and effectiveness of our company while enabling growth investments in consumer insights, research and development and marketing. This is very much in line with our strategy to reinvigorate Spectrum Brands as a leading innovator, brand steward and low-cost provider, delivering growth in earnings and free cash flow over the long term for our shareholders. If you could please move to slide seven.

As we enter the fourth quarter, while the businesses do face a number of headwinds, we've got inflation associated with input costs, we've got tariffs that are in the news almost every day, distribution, logistic costs and some sluggishness in the U.S. housing market, we are affirming our full year adjusted EBITDA guidance of $560 million to $580 million, and we expect to further improve leverage from net debt of 5.2x last year to 3.5x or better at this year-end. As you'll hear more details from Doug about our results, I'll simply focus my comments on how our teams across geographies, functions and business unit, are driving for vision, clarity and focus.

Our competitive positioning in the marketplace continues to improve with incremental investments this year weighted toward our strongest brands. Our teams continue to innovate and enhance customer relationships. For example, Home & Garden grew outdoor control volumes under the Spectracide brand by over 10% year-to-date, and that's despite the unfavorable weather that we experienced in the May, June time period. On a multiyear basis, we expect these brand investments to reach incremental customers and continue to grow share while leveraging our world-class manufacturing operations in St. Louis. In HHI, we are building on our #1 brand position in the residential security markets by pushing innovation into the electronics category and our leadership position in the smart home connected market with the addition of Aura, our new Bluetooth-enabled lock under the industry-leading Kwikset brand starting this fourth quarter.

This convenient upgrade from a mechanical lock system incorporates simple smart lock programming to allow for secure access in a number of ways: one, through the Kwikset app; a coded entry feature; and you can use a traditional key. In our Home & Personal Care results, we reflected growth this quarter in Europe and that was derived from innovation and core personal care product lines, and we have an entirely new leadership team focused on stabilizing the business here in the U.S., driving our core platforms and planting seeds for future growth. Clearly, this quarter, our Global Pet Care business was the highlight.

Strong companion animal results reflected a combination of premium product category growth, coupled with significant market share gains from our DreamBone and SmartBone product lines. In fact, in news and track channels, our double-digit growth in these brands is twice as strong as the overall category, and we will continue to innovate with new flavors and line extensions to come. If I could have you turn your attention to slide eight. We continue to focus on building a faster, smarter, stronger Spectrum Brands of the future. And after launching a detailed global productivity study, our teams have identified 4 primary areas of improvement.

These areas include: commercial and go-to-market models; procurement; supply chain operations; and G&A work streams, which we expect to unlock performance improvements as we continue to leverage our scale advantages while further strengthening our customer and consumer relationships with strong brands, innovation and consumer-facing marketing. During the quarter, the company invested approximately $20 million into these new Global Productivity Improvement Plan initiatives, and we have executed already on $35 million for the sourcing savings. The majority of these will be realized in fiscal 2020.

We expect a substantial portion of these savings will be reinvested into R&D, marketing and technology-enabling capabilities to drive growth and improve our cost position. Our Spectrum 20/20 guiding principles are Vision, where we're going; Clarity, what we prioritize; and Focus, how we execute. This is our pathway to a consumer-driven mindset, accepting nothing but outstanding quality and service while increasing innovation and marketing investments behind our brands.

These actions are driving a culture of greater accountability, quicker decision-making with an experienced and energized leadership team that has been refreshed with new talent and that are focused on operational excellence as we position our company for improved sales, earnings and sustainable free cash flow growth. With that introduction,

I'll now turn it over to Doug to go over the quarter.

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

Thanks, David, and good morning, everyone. Turning to slide 10 and a review of Q3 results from continuing operations beginning with net sales. Net sales declined 0.7% driven by unfavorable foreign exchange of 150 basis points, while organic sales increased 0.8%. Strong Global Pet Care sales were partially offset by lower revenues from Hardware & Home Improvement, Home & Personal Care and Home & Garden. Reported gross profit was down 0.5%.

Gross margin increased 10 basis points as positive pricing and productivity were partially offset by input cost inflation, tariffs and unfavorable product mix. Reported SG&A expense of $233 million increased 4.3% or 22.8% of net sales this year compared to 21.7% a year ago. Reported operating margin of 9.1% declined 130 basis points due to higher distribution costs, the absence of depreciation and amortization charges in the prior year from Home & Personal Care and higher restructuring charges.

On a reported basis, net loss and diluted loss per share were driven by the unrealized loss on our Energizer common stock, the absence of a large prior year income tax benefit and higher tax expense this year related to the recently issued regulations under the 2017 Tax Cut and Jobs Act, partially offset by lower interest expense. Adjusted diluted EPS of $1.35 increased 7.1% due to lower interest expense and shares outstanding compared to the prior year. Turning to slide 11. Q3 reported interest expense from continuing operations of $33.9 million decreased $29.4 million driven by lower debt levels. Cash taxes of $7.6 million were comparable to last year.

Depreciation, amortization and share-based compensation from continuing operations of $49.8 million increased from $33.6 million last year, primarily due to higher share-based compensation and the impact of the HPC depreciation and amortization this year as a result of moving the unit back into continuing operations. Cash payments for transaction and restructuring and related charges for Q3, including discontinued operations, were $14.6 million and $11.8 million, respectively, versus $27.5 million and $23.1 million, respectively, last year. The lower cash spend were driven primarily by HHI DC consolidation and divestiture activity in the prior year.

Now to business unit results, beginning with slide 12 in the Hardware & Home Improvement. HHI's 4.8% reported net sales decline reflected lower U.S. residential security and builders' hardware net sales, which were negatively impacted by $20 million of higher Kansas backlog shipments in the prior year, while plumbing grew modestly. Organic net sales declined 4.3%, excluding unfavorable FX of $1.8 million. And I'll also do the math for you on the $20 million impact year-over-year on Kansas, that would have -- if you strip out the impact of that, it would have resulted in about 1.1% organic growth. Adjusted EBITDA declined 8.4% to $67.7 million with 70 basis points of margin contraction of 19.1% from higher input costs, partially offset by positive pricing.

Looking ahead, HHI sees continued growth in its electronic deadbolt and smart lock product lines, especially given relatively low and fast-growing U.S. residential adoption rates. In Q4, we also plan to introduce new products, benefit from price increases and continue to invest behind cloud technology, mobile apps and access control. Now to Home & Personal Care, or HPC, which is slide 13. Reported net sales fell 4.3%, negatively impacted by unfavorable FX of $10.3 million. Organic net sales were essentially flat. Net sales for small appliances decreased primarily from prior year loss distribution in the U.S. mass channel in coffeemakers and toaster ovens, while personal care sales fell predominantly in the U.S. as a result of prior year haircare distribution losses in the mass channel.

These were partially offset by growth in Europe, primarily from e-commerce and U.K. food/drug channels, as well as growth across Latin America. The decrease in adjusted EBITDA and margin were attributable to higher transaction foreign exchange and input costs, partially offset by productivity. As we've said before, we are resetting HPC in fiscal 2019, rebalancing its cost structure and investing more behind its brands to prepare for growth in 2020. The newly installed leadership team will continue to focus on innovation across core product categories, coupled with financial recovery initiatives and organizational streamlining, business simplification and rationalization. Moving to Global Pet, which is slide 14.

Building on solid first half sales performance, reported net sales increased 13.9%. Excluding unfavorable FX of $3.5 million, organic net sales grew a very strong 15.7%. Significantly higher net sales were attributable to continued strong growth in U.S. companion animal, predominantly dog chews and treats, along with modest growth in U.S. aquatics. Net sales in Europe also grew, driven by favorable year ago comparisons from distribution center fulfillment constraints. Adjusted EBITDA increased 11.7% to $39 million with a 30 basis point margin decline to 17.6% as a result of increased volumes in companion animal and positive pricing, partially offset by higher manufacturing and distribution costs. In Q4, we expect another solid performance in our large U.S. region with new product launches, supported by higher investments in data-driven digital marketing, aimed primarily at the rapidly growing e-commerce channel. Pet continues to work to lower its global manufacturing and supply chain cost base and trim selective, unproductive SKUs, to drive a higher long-term margin structure.

Turning to Home & Garden, which is slide 15. The 2.6% net sales decrease was driven by unfavorable weather conditions during most of the quarter with reduced sales in household insect and outdoor controls being partially offset by growth in repellents due to strong early season home center orders. Adjusted EBITDA decreased 6.5% to $53.3 million, and EBITDA margin declined 110 basis points to 26.3% driven by input cost increases and higher marketing and advertising investments, partially offset by productivity and pricing actions.

Despite the weather challenges in Q3, we continue to expect Home & Garden to grow both sales and adjusted EBITDA in 2019 behind distribution wins. Moving to the balance sheet in slide 16. We completed Q3 in a solid liquidity position, including $724 million available on our $800 million Cash Flow Revolver and a cash balance of $161 million. Debt outstanding was $2.3 billion, down 51% from $4.7 billion at the end of fiscal 2018. Capital expenditures were $13.2 million in the quarter versus $18.5 million last year. Turning to slide 17 and our 2019 guidance. Spectrum Brand now expects reported net sales to be comparable with the prior year with foreign exchange having a negative impact of approximately 150 basis points based on current spot rates. We are affirming our full year adjusted EBITDA guidance of $560 million to $580 million.

Depreciation and amortization is expected to be between $230 million and $240 million, including stock-based compensation of approximately $55 million versus $12 million last year, with roughly $14 million of that expected in Q4. For adjusted EPS, the $29 million of catch-up depreciation and amortization in Q1 from HPC has been excluded. We are now increasing restructuring and restructuring-related cash spending to be between $60 million and $70 million relating to the Project Galileo, and capital expenditures are now expected to be between $60 million and $65 million. We have approximately $1 billion of usable federal NOLs remaining post the asset sales. This number has been updated to reflect the impact of the recently issued regulations under the 2017 Tax Act, as previously mentioned. And finally, for adjusted EPS, we use a tax rate of 25%, including state taxes.

Thank you, and now back to Dave for Q&A.

David A. Prichard -- Experienced Investor Relations, Corporate Communications, Marketing and PR Professional

Thanks, David and Doug. With that, operator, you may now begin the Q&A session, please?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Olivia Tong of Bank of America. Your line is open.

Olivia Tong -- BofA Merrill Lynch -- Analyst

First question I had was just about gross margin. I know it's up only 10 basis points, but I'm -- stabilization was nice to see. But I'm a little surprised, given the sales mix, given that you have an overage in one of your lower-margin businesses. So can you talk about the offsets? Anything else that helped even if it was just onetime-ish?

David M. Maura -- Executive Chairman and Chief Executive Officer

Sure, Olivia. It's a -- I mean, it's a combination of things across all businesses, and I understand that -- the mix sale like you're pointing to, but we did have good pricing across the Pet part of our business in the year and some continued good productivity. So even outside of our new productivity program, Galileo, that's a broader restructuring program. But even outside of that, this business and our operators continue to drive good productivity. We also had pricing in HHI that was in place in the quarter. So I would say that pricing and productivity are the primary drivers.

Olivia Tong -- BofA Merrill Lynch -- Analyst

Got it. And then, Dave, last quarter, you sort of downplayed the potential for profit and EPS, but your inclination would be to invest. So do you feel like you've got the right level of investment? Are there projects that potential moved around? Or were the projects that you have in place are just more successful than you had originally anticipated?

David M. Maura -- Executive Chairman and Chief Executive Officer

Yes, well it's multifaceted. I think -- look, we want to continue to invest. I really think we are probably 1 or 2 quarters away from trying to hit our rhythm, real rhythm and cadence, to getting all the investments we need in terms of real R&D, NPD and marketing. And what excites me is, quite frankly, this effort started two years ago in isolation in Pet. And you can actually see -- I'm telling you, these quarterly numbers are a result of two years' worth of hard work, where you really did get the right consumer insights, we really spent the money to invest in R&D to create a new product pipeline portfolio that got not only the customer but the end consumer really excited about product.

And then you put a little marketing on it to change the dynamic from just a push to a pull model, and you can see the growth you can get out of it. Look, we put -- I think, let me -- you asked a lot of questions, so let me hit it. On Home & Garden side, we did invest heavily to get distribution, and so it's frustrating for me to have a call like this where our results aren't even better there because we did the right thing for the business. We really did quite a good job. The team did an amazing job, it's just when you get an entire month where you're washed out and you got tornadoes -- and I know, I used to be on the sell side. You kind of hate that as an excuse, and I do, too, but it's just people aren't spraying their lawns and they're not fending off insects when it's just soak and wet for a whole month. So unfortunately, that impacts the short term, but that does not dull our enthusiasm or excitement for that business.

In fact, we just hired a new Head of R&D in Home & Garden, and we're building out an entire new R&D team there. And as part of 20/20, we're going to put additional resources behind that. So again, I -- look, on the appliance side, I'm thrilled. I mean we just went -- last quarter was a $2.7 million EBITDA quarter. We installed a completely new team there and to get that to $18 million EBITDA this quarter was a very nice rebound. Still a lot of wood to chop there. In HHI, we have to continue to find the right price point to get our velocity back up, just given the housing is a little slower than we originally planned at the beginning of the year.

But no, I think, look, I think we're going to continue with what we're doing. I think we're just getting into the real thrills of internally -- Doug just mentioned the word Galileoas the internal project codename, but this Global Productivity Improvement program is really exciting.

Olivia Tong -- BofA Merrill Lynch -- Analyst

Great. That's helpful. And then just lastly on cash flow. I know cash generation is typically very second half weighted. But usually by now, you're closer to running sort of flattish and you're not quite there yet, year-to-date. So I know you reiterated the EBITDA guide, but are you also expecting positive free cash flow for this year?

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

We are. We are. And what's -- but really this, the single biggest driver of the phasing of cash flow this year versus last year, Olivia, is the fact that we paid off so much debt early in the year that we dialed back some of our factoring programs. And as you know, we go -- prepared to go back into the working capital build season in the next few months. So we'll turn those factoring programs back on.

Operator

Our next question comes from Bob Labick of CJS Securities. Your line is open.

Robert James Labick -- CJS Securities -- Analyst

Good morning. Hi. Great. I wanted to dig in to the Global Productivity Plan. So $35 million of savings, I think that's the -- from procurement. And just to be clear, most of that gets reinvested. That's the first question, most of that gets reinvested into the P&L next year?

David M. Maura -- Executive Chairman and Chief Executive Officer

I tell you what, let me -- I want to give you a long-winded answer, but I want to give you as much granularity as I can, and we'll kind of get into this as we develop it. Look, we've been thinking a lot about how much of this do we disclose and when do we disclose it. And we wanted -- we just -- we want to disclose it as we get to it. And so this is really just phase 1 of it. There's a lot more to come, and next couple quarters will be a lot more work to be done on the program.

And we don't want to get out ahead of our skis at all. And so look, we spent a decent amount of money now executing the first wave. And you're correct that initial $35 million is strictly coming out of procurement side. There's more to come on the procurement side. And in fact, let me -- look, let me back up. This is really a very -- it's really a very exciting time for Spectrum. And I want to -- look, I want to thank all the associates that are listening in on the call. I know a lot of the employees call in. The team is really bought off on this what I call, GPIP, Global Productivity Improvement Program Plan.

And look, this last year -- a year stabilizing the business, investing behind it, we're doing the right things to -- we're treating the root so we can bear fruit a year or 2 from now. And look, we also significantly strengthened the cash structure, right? Our net debt reduction has been $2.4 billion in just the last couple quarters with more to come. And to Olivia's question on free cash flow, we actually delivered the free cash flow that we told the Board we would a year ago. So we're on track there. But operations is really, really what I'm getting jazzed about.

And at times, look, we all got caught up with short-term numbers and quarterly results and -- including myself. But look, it's a very -- we are taking some very real positive actions today that will create really positive tangible results a year or 2 from now. And that's why I'm excited. I mean look, we made a lot of progress. It's way too early to declare victory, we've got a lot more work to do. But if I could summarize it for you, again, '19, the whole goal is projected be a year of stabilization, assessing and repositioning the company for growth, right?

And despite these substantial tariff headwinds, the challenging Home, Personal Care category, the company's on plan through Q3 and it's going to be expected to deliver the year. So check 1. Operational improvements continue to stabilize financial performance, check 2. Customer service materially improve, across the board year-over-year, check 3, OK? When I look at, OK, now where do we go? Structural changes are enabling progress. Each business unit has been established as an independent global entity. That's completely new in the last 12 months.

The senior regional matrix structure has been eliminated, and operations have been streamlined, period. We have strengthened this organization, we've refreshed management, we've replaced management teams, we have upgraded talents throughout this company in very key positions, OK? So that's my point 2s, and I promised you I'd be long-winded. But the biggest point, we are improving culture. We're increasing accountability, and the teamwork is here. Business units are sharing best practices, they're collaborating at a high level despite the separations, recently of Home & Garden and Pet, but you can see that separation's actually bearing fruit. We have a quick candid acknowledgment of issues and absence, that are addressed fast today, that was not the culture when I took the expanded role.

We've got an open productive discourse around strategy, risk and problem resolution. So we've enhanced operations, organization and culture, and we have really positioned Spectrum to return to earnings growth. On the Global Productivity Improvement Plan, look, it's going to touch a lot of areas. So right now, we're in wave 1. That's strategic sourcing, OK? There's another wave to that. And then we go into commercial, and commercial has to deal with our go-to-market strategies, OK? Then there's a G&A part of this. Yes, there is.

And there's an IT enablement. We want -- there's a lot of things here that if we invest in IT, we can automate, we can give better data management. And quite frankly, we can do things a lot faster, a lot quicker much more efficiently, and there's a supply chain organization component to this. So it's multifaceted. It's a multiyear program. We're just giving you what we progress today. We're updating you with that today in today's press release. The payback is generally a year to 18 months on these things, and there's a lot more to come. Does that help you?

Robert James Labick -- CJS Securities -- Analyst

Yes. That was terrific and tons of detail and much appreciated. You touched on -- so I'll just -- I'll do one other quick question and then jump out. But just, obviously, you've maintained guidance for this year, has done really well in the face of tariffs. Can you just give us an update on the expected impacts from the main increase in tariffs and then the proposed new 10% on the next $300 billion? I guess lifts 3 and lifts 4 tariffs expected impact going forward, probably minimal for this fiscal year, but how do you think about it annually or next year?

David M. Maura -- Executive Chairman and Chief Executive Officer

Yes. I'm going to let Doug take the number side of it, but again, I just want to give a shout out to the team. I mean tariffs, it's no joke. It's a lot of work, the numbers are material. And it's easy to say, "I would take price," those are difficult discussions. Demand is not inelastic everywhere you go, and you've got hard to have -- to have hard conversations with your suppliers. You got to get more efficient yourself. And so there's just a lot of work going with the surface here to offset that. So I appreciate your comments as you led into the question. But I am really grateful to all the team members in this company for pulling together and for helping us get the offsets necessary. But Doug, why don't you take the nitty-gritty?

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

Yes. Sure. So about round numbers, the impact of all the tariffs that are implemented to date. So I'm excluding the most recent week because there's just not clarity yet on what that's going to impact and what the timing will actually be. We think we know the timing is, we don't know what the scope of it is. So I'm going to talk to what's out there. And what's out there impacted -- will impact 2019 by about $70 million, and then the fully annualized amount of that, which will be realized in 2020 on a run rate basis, is $120 million. So another $50 million step-up going into next year. And that, to date, has been -- and you see this in our gross margin. It's been largely offset by a combination of pricing and productivity. And our plan is to continue to manage those 2 levers as we go forward. But as David said, pricing is -- are not easy discussions. They're challenging discussions with retailers, but we have been with our customers for several months, and everybody understands the landscape. So we'll continue to do that and continue to press hard on productivity elements.

David M. Maura -- Executive Chairman and Chief Executive Officer

Net-net, tariffs are tough. We're tougher. We'll manage them.

Robert James Labick -- CJS Securities -- Analyst

All right. Thank you very much.

David M. Maura -- Executive Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Faiza Alwy of Deutsche Bank. Your line is open.

Faiza Alwy -- Deutsche Bank AG -- Analyst

So I guess like just to follow up on the tariff question. I know Dave, you mentioned sort of varying elasticities across categories. So it seems like you've taken some pricing so far. Can you share sort of what you've learned so far and which categories have you found to be more elastic than others?

David M. Maura -- Executive Chairman and Chief Executive Officer

No. I really don't want to go into that. And I'll be honest for competitive reasons, I'll just -- listen, it's intuitive, right? Obviously, we have the strongest brands and you have dominant market share positions, you tend to have more pricing power. But honestly, listen, we've taken price across the entire business line. We can do that. But yes, I mean there have been instances where we've taken price, and you can see the elasticity. And it's -- we integrated manufacturer, and so sometimes you just have to reassess. And that's -- listen, that's what's so fantastic about this Global Productivity Improvement Plan, is we're going to free up resources by running the company a lot more efficiently, free up cash, a lot of cash. And we can now invest that into R&D, NPD, advertising, marketing,etc. We can also potentially invest that in margin, right? Assuming we get that luxury over the next couple of quarters, and then we can ramp up volume again. And so that's why I said in some of my earlier remarks we -- that's why I'm excited. It's been -- look, the team -- there's been a lot of hard work this year stabilizing platforms, everybody's bought into this. There is no -- we're going forward with this program with the tip of the iceberg. And there's just a lot to be had, and it's going to -- I think it's going to meaningfully improve our ability to navigate the competitive tariff waters we find ourselves in today. I really don't want to add more color than that.

Faiza Alwy -- Deutsche Bank AG -- Analyst

Okay. Understood. Can you talk a little bit more about -- I know you've mentioned sort of productivity and like sourcing benefits, things like that. Are you doing anything from sort of reducing the tariff exposure from that perspective? Like are there changes that you've made in terms of sourcing, whether it's moving out of China or moving into other countries or moving to the U.S.?

David M. Maura -- Executive Chairman and Chief Executive Officer

I mean look, there are some small supply chains we're doing, but there's nothing of the magnitude you read about in the press. Picking up a supply chain and moving it is a big decision. And as a financial allocator of capital, you would need to know that this is going to be the tariff landscape for the next 60 months. Otherwise, you can make a decision that might good look on paper today, but if something changed in a year, would be a very negative return on capital. So you got to be careful to not have a knee-jerk reaction, but you also need to protect your company in the short term. And so I would say, look, we've done a little bit around the margin, and we're always looking for ways to hedge exposure, but nothing dramatic. Doug, do you want to...

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

No. I agree with that, yes.

Faiza Alwy -- Deutsche Bank AG -- Analyst

Just last question for me. David, seems like you -- it seems like you think that there are a lot of investments that you would like to make in the business that are above and beyond than what you've made this year. So in that context, can you share with us how you're thinking -- I know it's early, but how you're thinking about 2020, and what level of investments do you think are required in the near term to get the businesses to continue to grow or grow at the pace that you would like them to grow?

David M. Maura -- Executive Chairman and Chief Executive Officer

Yes. I'd like to kick the can on that and talk about that. We have our AOP plans in October, I'd really like to talk more about that as we get into next year. But I mean if you're asking me, can we make these investments and still grow the top line, grow the bottom line in 2020? I'm going to tell you yes. So -- but I -- I'm not going to go into, hey, I need another $5 million R&D in this division by this time. There's just -- yes, sorry.

Faiza Alwy -- Deutsche Bank AG -- Analyst

Again thank you.

Operator

Our next question comes from Sam Reid of Wells Fargo. Your line is open.

Richard Samuel Reid -- Wells Fargo -- Analyst

Wanting to dig a little deeper on your growth in the Global Pet segment. Obviously, results here were pretty good, and I think maybe a little bit better than a lot of people were anticipating on the organic line, at least. So could you give us a sense as to sort of how much of that reflects maybe the underlying strength of the business versus anything that might be more one-off like better-than-expected shelf space gains or maybe catch up from some of headwinds you guys faced last year?

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

Yes. Sam, the only significant year-over-year comp issue -- and it is significant, it's about $6 million impact from last year when we were starting up a European DC and some orders moved from Q3 to Q4. Other than that, we're seeing underlying strength in our companion animal business. Our treats business in particular in the U.S. market has been strong. European market overall continues to perform nicely for us this year. And even U.S. aquatics grew a little bit year, and that's the one that we have the most difficulty pegging from a year-to-year basis. It's never going to move in a huge way one way or the other, but this year, it's broken a little bit favorably for us.

David M. Maura -- Executive Chairman and Chief Executive Officer

Look -- let me -- listen, let me give you the bigger picture. This was -- for me, this was 10 years of doing acquisitions. And as long as I did an acquisition, we just -- everything kept growing great. And what's going on right now is, in my new role, is we're actually fundamentally investing, buying organizations, organically, to grow. And that's what I thought was getting done, but it wasn't getting done. And so after '18, that's the reset of '19 is to actually put seed in the ground through R&D, through new product development and marketing and drive the businesses organically so they don't need acquisitions. And it's ironic that I'm the one saying that and leading the program, I'll tell you that. But I -- I'm telling you that the Pet business is a shining example of when you actually do the hard work and you bite the bullet and you invest in R&D, you have true new products to excite -- to basically to excite the retailer but get the consumer to be excited about pulling it away off the shelf and get the velocity up at the point of sale, and then you've got something to write home about. This is no one trick pony. I think the Pet business is in early innings of a real bull run, and it's fundamental work. And that's -- again, that's why I'm really jazzed about -- look, through the December and March quarters that we have coming up, we're taking real actions to make sure that, that's going to happen in the remaining 3 units.

Richard Samuel Reid -- Wells Fargo -- Analyst

Got you. Now that's super helpful, I appreciate the color there. Wanted to maybe switch gears a little bit and touch on HHI just for a second. It looks like the growth there actually still accelerated on a two year basis even after stripping out some of that backlog last year. I wanted to know if there's -- if that's a reflection of the underlying category growth. I know you mentioned a little early on the call that you were still seeing some weakness there, at least in the new home market, or whether that's also just a reflection of some of your pricing actions.

David M. Maura -- Executive Chairman and Chief Executive Officer

You're one of the first to notice that. I thought most people would take a much more negative view there, but you're not wrong. If you actually strip the noise out, you're right. I'm still cautious. Everybody's mad at me because I think I was a little negative on housing on the first quarter call going back, I guess it was 2 or 3 quarters now. But look, again, I'm not an economist. I would tell you this. I think we've got the right brands, we actually have a pretty healthy NPD pipeline, we're launching new products. I think that's the one area where we actually can do a few things on some levers that we control ourselves to stimulate more velocity at POS, point-of-sale.

And so look, I also will tell you this. If you look at housing starts, I mean, they really haven't got up. They've been on their back ever since kind of the '09, '08, '09, the great recession. I mean we -- this country hasn't produced a million new homes starts in God knows how long. So you're still in the 600, 650, 700-ish range. But the backdrop, if you really look at it, is not that bad. Interest rates are on the floor. Everybody seems to have -- wants a job, has a job. I think the big 2 restraints that are macro here are student loan debt and -- but millennials grow up, and they want kids.

And so look, multifamily continue to be a strong point, and that's where I think we have a lever with our Smartkey technology. I was in a hardware store the other day, and the guy called me that Smartkey related to one of our Kevo or one of our Aura products. And I was like, no, it's the ability to change your lock in 90 seconds or 60 seconds without having to call a locksmith. So as we've had this great IP, this patented technology, and it -- I was talking to home -- actually I talked to a multifamily guy the other day, and the business unit's actually bidding the guy now on a deal, but this guy owns billions of dollars of apartments around the country.

And I was telling him about Smartkey, and he didn't know about it. I said, "my God, you know how much ease and money you could save yourself if you use our Smartkey technology?" So again, I think there's a lot more we can do there, but I actually don't think the backdrop is as bad. I think -- I've talked to some people that think we can have a super cycle, almost slow growth, but it goes for a really long time given the rate and the income backdrop. But look, trying to be specific to your question, I think there's a couple leverage we can pull to get growth going better at HHI.

Richard Samuel Reid -- Wells Fargo -- Analyst

That is incredibly helpful. Thanks so much guys.

David M. Maura -- Executive Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Ian Zaffino of Oppenheimer. Your line is open.

Mark Zhang -- Oppenheimer & Co. -- Analyst

This is Mark on for Ian. Just quickly, can you guys touch upon the growth of e-commerce? It seems like you continue to grow in Europe. I guess like how big this e-commerce now is a portion of HPC? And where would you guys like to see that grow to?

David M. Maura -- Executive Chairman and Chief Executive Officer

Yes. Look, thanks for asking the question. E-comm is a really big bright spot at Spectrum Brands. E-comm grew, I think, 20% this quarter. Doug? Somebody correct me if I'm wrong.

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

A little over 20%. That's right.

David M. Maura -- Executive Chairman and Chief Executive Officer

So north of 20% growth, and that's the corporation. I mean E-comm used to be 0. I think we're over $400 million. I'd like to get that number bigger, faster. But -- and we've -- listen, again, it's part and parcel with the whole Global Productivity Improvement program. And we're deliberately hiring digital experts, guys that actually understand like, I don't, how to write and read algorithms and how to get the product viewed and placed at the right point, how to bid ads and -- so it's a great opportunity for us. It clearly is a bright spot. We've got a lot more room to run. I don't know, Doug and...

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

Mark, the only thing I'd like to add to that just for clarity is we've measured e-commerce, we were talking to you about e-commerce in the U.S. and in Europe. We have obviously e-commerce platforms in Latin America and Asia Pacific too, it's just more difficult for us to separate what's going to brick-and-mortar from pure play or from e-comm. But we, obviously, we grew a little faster in Europe from a rate perspective than we did in U.S. but both very healthy.

Mark Zhang -- Oppenheimer & Co. -- Analyst

Terrific. Thank you guys very much.

Operator

Our next question comes from Karru Martinson of Jefferies. Your line is open.

Karru Martinson -- Jefferies LLC -- Analyst

It's been a while since we haven't heard you talking about M&A and talking about reinvesting in the business like you said. Does that change the rating agencies' perspective of you? And does that change the way the equity market looks at you?

David M. Maura -- Executive Chairman and Chief Executive Officer

Man, Karru, please, can you make phone calls to 2 places for me? I would -- yes, I did all the deals for 10 years, and now I'm fixing the ops. But no, look, you're not wrong, right? I mean our -- I think we're trying to be conservative, saying we'll be 3.5x levered or less, closing this year out. And our free cash flow is going to materially improve as we go into 2020. And yes, I thought less levered credit should create higher multiples in terms of the equity value. So I appreciate your comments. I don't know how to execute them. I'm doing everything I can on my side.

Karru Martinson -- Jefferies LLC -- Analyst

Okay. And then in terms of that stub tease. So the 6 arrays of the 22s. What are your thoughts on the capital structure that this company should have for the long term?

David M. Maura -- Executive Chairman and Chief Executive Officer

Yes. No. Listen, I'd like to get those out of there yesterday. If we didn't have another tariff tweak, I probably go sooner rather than later. Clearly, the 10-year treasury down at 1.6% doesn't hurt, but equity volatility doesn't help. And again, it's just another lever we can pull to lower our interest expense and pay down our debt and generate more free cash. So yes, you're not wrong. That's another low-hanging fruit. We see it, and if it's appropriate time, we'll go get it.

Karru Martinson -- Jefferies LLC -- Analyst

Thank you very much guys appreciate it. Thank you sir.

David M. Maura -- Executive Chairman and Chief Executive Officer

Operator looks like we have time for one more question and one question please.

Operator

Our next question comes from Carla Casella of JPMorgan. Your line is open.

Carla Casella -- JP Morgan Chase & Co -- Analyst

Most of my questions have been answered, but just one thing on the tariffs. Can you just say how much of your product was covered by the first 3 lifts of tariffs versus the lifts 4? And you didn't quantify any impacts of the lifts 4 but how much of your products were covered under that list 4?

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

We'll have to get back to you on that when -- I don't have them in front of me or even -- we'll have the same slice of data a little different way to get that because it looks at the entirety the supply chain. But so far, HPC, the clients' business is actually been impacted less than some of our other business. HHI's been impacted in a meaningful way. Pet, in a meaningful way. And then Home & Garden, much lesser as well. But Dave or Kevin will follow up with you, Carla, on the details.

David A. Prichard -- Experienced Investor Relations, Corporate Communications, Marketing and PR Professional

Okay. With that, we've exhausted our questions and are pretty much close to the top of the hour. So we will conclude our conference call at this stage. Surely, we want to thank David and Doug, and on behalf of all of us here at Spectrum Brands, we like to thank you for participating in our fiscal 2019 third quarter earnings call. Have a good day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

David A. Prichard -- Experienced Investor Relations, Corporate Communications, Marketing and PR Professional

David M. Maura -- Executive Chairman and Chief Executive Officer

Douglas L. Martin -- Executive Vice President and Chief Financial Officer

Olivia Tong -- BofA Merrill Lynch -- Analyst

Robert James Labick -- CJS Securities -- Analyst

Faiza Alwy -- Deutsche Bank AG -- Analyst

Richard Samuel Reid -- Wells Fargo -- Analyst

Mark Zhang -- Oppenheimer & Co. -- Analyst

Karru Martinson -- Jefferies LLC -- Analyst

Carla Casella -- JP Morgan Chase & Co -- Analyst

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