Jarden's (JAH) CEO James Lillie on Q2 2014 Results - Earnings Call Transcript

| About: Jarden Corporation (JAH)

Jarden (NYSE:JAH)

Q2 2014 Earnings Call

July 24, 2014 8:30 am ET

Executives

Rachel Wilson -

Martin Ellis Franklin - Co-Founder and Executive Chairman

Alan W. Lefevre - Chief Financial Officer and Executive Vice President of Finance

James E. Lillie - Chief Executive Officer and Director

Analysts

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Charles Strauzer - CJS Securities, Inc.

Lauren R. Lieberman - Barclays Capital, Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Michael Steib - Crédit Suisse AG, Research Division

Kevin M. Grundy - Jefferies LLC, Research Division

Nik Modi - RBC Capital Markets, LLC, Research Division

Christopher Ferrara - Wells Fargo Securities, LLC, Research Division

Andrew Burns - D.A. Davidson & Co., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to Jarden Corporation's Second Quarter 2014 Earnings Conference Call. This morning's call will begin with formal remarks by management followed by a question-and-answer period. [Operator Instructions] I will now turn the call over to Rachel Wilson from Jarden's Investor Relations.

Rachel Wilson

Good morning, and thank you for joining us for Jarden's Second Quarter Fiscal 2014 Results Conference Call. In accordance with Regulation FD or Fair Disclosure, we are webcasting this conference call. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Jarden is strictly prohibited.

Before we begin, please take note of Jarden's cautionary statements regarding forward-looking statements at the end of our earnings release issued earlier today. Some of the statements made today during the conference call will be considered forward-looking. While forward-looking statements are based on currently available information, Jarden's actual results could differ materially from those predicted. However, Jarden undertakes no obligation to update any such statements, whether as a result of new information, future events or otherwise. Please refer to Jarden's SEC filings for a more detailed description of the risk factors that may affect Jarden's results.

Please note that Jarden has posted supplemental financial data slides to its website and is providing reconciliations of certain non-GAAP to comparable GAAP financial measures in its earnings release, its current report on Form 8-K in connection with the earnings release and on its website. The presentation can be downloaded in the section For Investors on Jarden's website under the Events & Presentations heading.

And now I would like to turn the call over to Executive Chairman, Martin E. Franklin. Martin, please go ahead.

Martin Ellis Franklin

Thank you, Rachel. Good morning, and thank you for joining us to discuss our second quarter results. Joining me today, presenting our prepared remarks are: Jim Lillie, our Chief Executive Officer; and Alan Lefevre, who formally took up his CFO duties on June 12. Ian Ashken, our Vice Chairman and President, is also with us today. For our call this morning, I will begin with highlights of our second quarter performance and a review of our recent capital allocation activities. Following our prepared remarks, we will open the call to questions.

Q2 was another solid quarter, keeping us on track to achieve all of our stated annual financial goals. In the quarter, we posted positive organic growth in all segments and continued expansion in gross margins, giving us good momentum as we enter the important back half of the year. The strength of Jarden's diverse consumer portfolio is evident in the financial performance we reported today. Our organic sales growth in Q2 was over 3% and our trailing 12-month organic growth was 3.4%, both in line with our 3% to 5% long-term target. We achieved record second quarter revenue and operating earnings.

The broad-based organic growth experienced this quarter was driven by the success of our initiatives, product innovation, geographic expansion and category extensions. In our first quarter call, I highlighted our new product development and innovation efforts. New product development is critical to our growth and an area where we direct substantial resources with a strong return on investment. I am pleased to report that retailers and consumers continue to recognize our brands for innovation and performance.

While we typically only highlight various industry and other awards that we receive on an annual basis, as our fishing businesses is currently in season, their broad-based win at the major European fishing trade show, EFTTEX, which is the European Fish Tackle Trade Exhibition, is noteworthy. Fishing's EFTTEX New Best Products Award winners include best fly reel with the Hardy Ultralite SDS, best braided line with the Berkeley Black Velvet and best multiplier reel with the Abu Garcia Revo Beast. Pure Fishing's innovation remains strong and as over 20% of their revenues through Q2 have been derived from new products. Jarden was also proud to be recognized by Fortune Magazine with Jarden's Fortune 500 ranking increasing to #356 for 2014, up 27 spots from our ranking the previous year.

Earlier this month, we opportunistically entered the European capital markets for the first time since 2010 to take advantage of the historically low interest rate environment, issuing EUR 300 million of senior notes due 2021 in a private offering that closed on July 14. The notes bear an annual interest rate of 3 3/4%. Issuing euro-denominated debt not only helps us naturally match our cash generation in Europe with our debt obligation but also fits nicely with our debt maturity profile as we don't have any other debt maturities in 2021. This issuance continues our trend of opportunistically flattening and extending out the debt payment schedule with lower-cost money. In terms of the use of proceeds, we intend to use the net proceeds from the euro offering for general corporate purposes, including the funding of potential acquisitions.

Regarding acquisitions. In June, we completed a tuck-in acquisition of Cadence, a Brazilian appliance asset in our Consumer Solutions segment. Cadence offers local production capabilities and significant country operational experience, while enhancing our presence in Brazil, an important future growth market for us. Cadence is a well-run but small family business that was founded in 1999. We first looked at the business in 2011. And as with many of the other transactions we've completed, they have a long gestation period as we maintain a disciplined approach to completing any acquisition. Over time, we expect to capitalize on the platform that Cadence offers to accelerate growth in Brazil for JCS and potentially for other Jarden businesses seeking an additional launchpad in the region.

In our last quarterly call, I noted several leadership promotions and changes to ensure that our company has the right leadership structure. Our expanded leadership team has hit the ground running and is already provided valuable support to the Office of the Chairman as we prepare the next phase of Jarden's expansion and growth. Al will provide with more color in his comments regarding a major initiative he is responsible for as we move towards accomplishing the macro 5-year goals we detailed on our last quarterly call. Partnering with Rich Sansone, our Head of Operations, and John Capps, our Head of Legal and Administration, we have a very good line of sight on many margin-enhancing initiatives.

It is my pleasure to now and for the first time hand the call over to our new CFO, Al Lefevre. Al?

Alan W. Lefevre

Thank you, Martin. I am pleased to be addressing you on my first earnings call as Jarden's CFO. While I am obviously still in a learning mode, I have already had the opportunity to meet with several of you at investor conferences and during the recent European debt offering. I look forward to meeting and speaking with many of you in the future.

For those of you that are not familiar with my background, I have more than 25 years of experience in the consumer products industry. I joined the predecessor company to Jarden Consumer Solutions in 1997 and became part of Jarden when Jarden acquired the business in 2005. For the past 14 years, I have been CFO of Jarden's Consumer Solutions business. I am very familiar with how many parts of Jarden works. But most importantly as I settle into my new role, I am familiar and aligned with Jarden's DNA, its culture and its emphasis on values, integrity and reputation. My focus is on continuing the strong financial and operational discipline that has driven Jarden's consistent financial performance. I am pleased that Ian and others are here to help support me in achieving these objectives.

Before reviewing our numbers, I want to remind everyone that consistent with our quarterly practice, we have posted a more detailed financial presentation of our second quarter fiscal 2014 performance on our website. We have also continued to disclose both as-reported and as-adjusted results separately in our press release.

For the second quarter, net sales increased 12.3% on an actual basis and 3.1% on an organic basis. As you can see from the supplementary slides, our sales in the second quarter were $1.98 billion and adjusted gross margin was 30.8%, an increase of over 150 basis points year-over-year, driven primarily by the inclusion of Yankee Candle and strong performance at Branded Consumables, partially offset by declines at Jarden Consumer Solutions. Adjusted SG&A as a percent of sales increased 120 basis points in Q2 on a year-over-year basis reflecting the higher SG&A cost primarily related to Yankee Candle and its retail store footprint. For full year 2014 modeling purposes, we continue to expect adjusted gross margin to increase by approximately 150 to 200 basis points with segment earnings margins of approximately 13.5% to 14%.

Year-to-date, we have repurchased approximately 3.5 million shares at a value of $208 million. During the quarter, we repurchased approximately 800,000 shares of our common stock for approximately $45 million. We have $292 million remaining under our current stock purchase authorization. For the first half, we reported fully diluted shares of 126.9 million shares and expect the fully diluted share number for the full year to be in the range of 127 million to 128 million depending on the impact of our future stock price on our convertible notes.

As Ian discussed on our first quarter call, in March we provided notice of our intention to call all of our 7.5% senior subordinated notes due 2020, which included outstanding principal for the U.S. portion of $275 million and a euro portion of EUR 150 million. The redemption of these notes was completed in April. As a result, during the second quarter, we recorded a loss on early extinguishment of debt of approximately $54 million related to the note redemptions. On an annual basis, we continue to expect as-adjusted net interest to be in the range of $180 million to $190 million for full year 2014 as we anticipate our average cost of borrowing to be in the 4% range.

Adjusted fully diluted EPS for the second quarter was $0.91. This compares to second quarter fiscal 2013 adjusted diluted earnings per share of $0.88. Cash flow generated from operations for the second quarter was $84 million. The decline from a year ago is inclusive of the $42 million cash impact from the early debt extinguishment and an FX loss of $14 million related to Venezuela cash conversion. For the full year 2014, we continue to expect to generate at least $650 million in cash flow from operations.

Our bank leverage ratio was 3.7x at the end of the second quarter compared to 3.3x at June 30, 2013. Our long-term goal remains to maintain our bank leverage ratio at or below 3x at the end of each fiscal year. Capital expenditures were $58 million or 2.9% of sales in the quarter. We continue to expect our CapEx to be in our 2% to 2.5% range of sales in 2014.

Adjustments to net income for the second quarter were approximately $61 million and included approximately $10 million of acquisition-related and other costs primarily associated with the rationalization of international manufacturing facilities, a nearly $10 million FX loss on Venezuela cash conversion and $54 million related to the loss and early extinguishment of debt. Also included in the adjustments to net income are the regular adjustments for noncash amortization of acquired intangible assets, which was $6 million, and $9 million in noncash OID interest as well as a tax provision increase of approximately $29 million, which reflects the normalization of the adjusted results of the company's 2014 estimated 34.5% effective tax rate.

We continue to expect to see an impact from year-over-year fluctuations in currencies. Based on current rates, excluding any impact from Venezuela, we currently anticipate a full year negative 2014 revenue impact of approximately $40 million to $65 million versus $113 million headwind experienced in 2013. We continue to report our Venezuela results using the official exchange rate of VEF 6.3 to $1 and report any transaction gains or losses against a new SICAD I or SICAD II rates in our actual results. As we're still in Q1, it still remains unclear whether our business will be eligible to actually convert a meaningful amount of bolivars at any of these 3 rates. And we await further clarity as the year progresses to determine if there is a more appropriate rate to use for translation purposes.

As mentioned on our last call, this year, we launched a significant new 3-year initiative, which we have named Project Lean. The project is based on a zero-based budgeting approach to leveraging our SG&A as well as a revaluation of all of our back-office processes and expenditures to drive future efficiency and cost savings. We will be focusing initiatives in 3 key areas: one, continued back-office consolidation and leveraging of administrative functions; two, procurement expense optimization and reduction as we more efficiently consolidate and pool our expenses across the Jarden platform; and three, reviewing our business processes to restructure them to meet the future long-term needs of the business.

I am excited to take on the responsibility for this major initiative. I believe my experience at JCS across finance and operations as well as my experiences in other Jarden cross-company projects will be helpful as we analyze all SG&A cost and processes outside of investment spend, which we anticipate continuing at current levels. I will now turn the call over to Jim.

James E. Lillie

Thanks, Al, and good morning, everybody. As Martin and Al mentioned, we are pleased with our progress year-to-date. Our consistent performance continues to demonstrate the ongoing benefits of our business model, which begins with powerful consumer brands that are diversified across product categories and geographies. This model, along with the disciplined execution of our strategies, continues to yield results in line with our long-term financial goals of: delivering organic sales growth of 3% to 5% per year; continue to leverage SG&A; expanding segment earning margins by over 150 basis points from the 12.7% of fiscal '13; generating average annual earnings growth of at least 10%; and ending the year, as Al said, with the bank leverage ratio at or below 3x.

As you may have heard us discuss during investor conferences during the second quarter, certain specific retailer replenishment activity did not consistently keep pace with the healthy consumer POS performance we were experiencing. While we delivered results consistent with our guidance and ahead of the consensus of analysts, this lack of replenishment negatively impacted sales in the quarter. Importantly, we're seeing some of these orders flow through, which we believe will further support our Q3 performance. We are also pleased to report that the issues we experienced in Q1 of product not making its way from the back of the store to being on-shelf has been addressed in line with our expectations. And the customer traffic being adversely affected by the consumer credit security concerns has diminished.

Jarden's diversification continued to serve us well in the seasonally appropriate spring weather, aided by the continued sell-through of many of our traditional seasonal products. In particular, we were pleased with the POS performance across a broad assortment of products, such as baseball and softball gear as well as fishing, camping, fresh preserving and casual entertaining products. In general, we saw consistent growth across the in-season product lines throughout the U.S., Europe, Latin America and Asia. Importantly, we are experiencing growth across our primary business lines in all regions as we continue to see ongoing general improvement in the global economy.

In the quarter, we delivered strong organic sales growth in Branded Consumables of over 6%. While we will not include Yankee Candle's organic growth in our numbers until Q4, as expected, the transaction had a dilutive impact on earnings in the second quarter and first half as the business produces most of its earnings in the second half of the year. We continue to be pleased with Yankee Candle's performance and ongoing international and wholesale growth development plans and actions. Our Branded Consumables' organic sales growth leaders remain consistent with those in Q1, namely Fresh Preserving, First Alert and our Home & Family business.

The fresh preserving season is in full swing, and the recent launch of the Ball limited edition heritage jar in green that features the original Ball Jar design and logo from 100 years ago as well as our new auto canner appliance were standouts. Within European home care, the Mapa Spontex branded products performed well, particularly given the backdrop of a modest European recovery. Jarden Branded Consumables additionally increased segment earnings by over 35% year-over-year, reflecting strong revenue growth and mix inclusive of Yankee Candle.

Consumer Solutions generated organic revenue growth of approximately 2% for the quarter, which is regionally led by the Americas. As we stated in our first quarter call, we believe that JCS remains well positioned to continue its growth path in the seasonally important back half of the year. With the acquisition of Cadence, we now believe we have a solid strategic path and experienced local management team to help meaningfully increase JCS's net sales in Brazil over $100 million during the coming years. Importantly, their platform will aid all of Jarden as we continue expansion in the region.

Outdoor Solutions revenue organically grew approximately 2% reflecting strength in our spring sports business mentioned earlier as well as spring apparel. JOS was the segment most impacted by the POS and replenishment challenges I discussed earlier. I was with our sports licensing team this past week, and they had every one of Jarden businesses in attendance as they continue to work together to plan new opportunities for margin-enhancing growth in this category, utilizing our licenses with the NFL, NCAA, Major League Baseball and others. As we have continued our focus on profitable growth, I am pleased with JOS's segment earnings margin increase of over 100 basis points year-over-year as many of our category leading brands appropriately adjusted price in this segment. We have noted that specifically in our JOS segment, the specialty and Internet channels have been performing relatively well versus other retail channels. This is a trend that we expect will continue, particularly as we experienced a macroeconomic recovery.

Process Solutions, though far smaller than our other 3 primary divisions, continues to be a consistent and positive contributor to overall portfolio, delivering organic growth of approximately 4% this quarter. From a commodity perspective, we expect the remainder of 2014 to be relatively stable. Based on this current outlook, including the FX impact, as Al outlined, and the movement in our fully diluted share count based on our quarterly weighted share price, we are upwardly narrowing our fully diluted adjusted earnings per share range to $3.86 to $4.02 per share. We continue to expect that variance within our EPS guidance range will largely be driven by currency and share count fluctuations, not operational performance.

In summary, we expect our performance in 2014 to be very much in line and contributing to the achievement of our longer-term performance goals and are comfortable with the guidance we provided previously on 2014 performance expectations. I spent much of this past quarter on the road visiting our businesses. And most recently, I spent this past week along with Martin and Ian with all of our senior management teams from around the world for our annual global strategic planning meetings. I'm energized and encouraged by my travels and these meetings. It's an exciting time at Jarden as we are in the first year of executing on our updated 5-year goals with the strength of Jarden's robust consumer products platform and newly enhanced organizational structure. Our teams are aligned with our macro goals, and we have an array of product and profitability initiatives that we expect will continue to deliver consistent performance across our business segments. Equally gratifying was all of the cross-business collaboration activities that is a hallmark of Jarden and which allows us to expand our global footprint at a faster pace and more effective cost basis.

With those comments, I'd now like to turn the call back over to Martin for some final comments. Martin?

Martin Ellis Franklin

Thank you, Jim. We're pleased with our results in Q2 and feel very well positioned across each of our divisions. As we begin the second half of the year, we remain confident in our ability to achieve our long-term financial objectives. And with that, I'd now like open the call to any questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Bill Chapelle of SunTrust.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Just kind of want to follow up on the replenishment order issue. I mean, clearly, nothing's wrong with 3% organic growth. But it sounds like it could have been 4% plus. So I guess on that, can you maybe give us -- maybe quantify how much impact it's had in the quarter or maybe what you were seeing in kind of the delta between sales versus POS in Outdoor Solutions? And then also on the same thing, this was kind of last quarter, it was destock, this quarter, it was replenishment. What gives you confidence we don't have something pop up in 3Q and 4Q and every last month of each quarter?

James E. Lillie

Well, let me answer in reverse. I have no confidence that things won't continue to pop up. And so we continue to budget conservatively. We continue to have healthy conversations with retailers. Back to your original question, yes, I would size it in the $20 million range, give or take, of revenue that was probably lost out because replenishment didn't keep pace with POS. POS was very healthy in the sports businesses. Baseball, for example, during May and June had 8% to 12% POS improvement. The fishing products were moving. I think that there's an amount of private-label product on certain retailer shelves that isn't turning. And so the only way you can really put the brakes on and to impact working capital in the quarter is to cut off branded products. And we really saw that kind of universally. But as I said, most of it was in JOS and most of it occurred during the last, I would call it, 12, 15 days. But remember, you need to be on shelf in the season in order to have the revenue. And so while we see some of those products flowing through into early Q3, certain seasonal products, such as baseball, come to a natural organic end based on the calendar.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Got it. And then just switching -- as I look at kind of the EPS guidance for the year, maybe can you give a little more color around the Brazilian acquisition in terms of sales or any accretion there, and then the does the EPS number include any incremental share repurchase?

James E. Lillie

The EPS guidance does not include any share repurchase. The Brazilian business is small, and we can -- offline, we can help you model through that. But as I said in my prepared remarks, we want to see that business, coupled with JCS's existing platform, grow to over $100 million in size. And more importantly, if it provides a foundation for the other Jarden businesses to have manufacturing equipment or a place for people to hang their hat in Brazil, that's really the benefit of the growth because it will help us grow faster in Brazil and on a less expensive basis than what we might have otherwise been able to do.

Operator

We'll take our next question from Charlie Strauzer of CJS Securities.

Charles Strauzer - CJS Securities, Inc.

Just if you could talk a little bit to about the recent raise in Europe. And Martin, what are your thoughts there in terms of -- I know you like to be opportunistic. But are you feeling a little bit better about the M&A environment out in the international environment there?

Martin Ellis Franklin

Yes. I mean, look, the reality is I think we hit the market at just the right time. As I'm sure everyone on the call knows how rates in Europe, the 10-year in Europe in both Spain and Germany have been below the 10-year in America. And we have a lot of assets and a lot of cash flow being generated in Europe. And so we thought this was very opportunistic. And with hindsight, we were right and we hit the market at the right time, as I said. And it's gotten a little bit tighter. The market has gone -- spreads have widened a little bit since we did the issue. So we're pleased that we did that. At the same time, from an M&A perspective, our modus operandi has been and you know this, we've been doing this for 13 years now, we've been buying businesses in down markets and up markets and in weak economy environments and in strong economy environments. But the reality is we find opportunities, and some of them just at different times. As I said in our prepared remarks that Cadence was an acquisition that we went down to Brazil, and that was in 2011. And only we didn't do a transaction at the time. At the time it was driven by different issues, some of it was comfort with Brazil, some of it was driven by valuation. And we reached an agreement at a time where it worked for both sides. We've got other situations that we've looked at for a long period of time that start coming together. What is a constant is our discipline on valuation. And we've seen other companies, some that have been in the public domain that just pay multiples that we don't pay. And we're perfectly happy to miss those opportunities because I think Jarden is a great company despite the fact that we've missed those opportunities. And I think that's driven value for shareholders. So there are opportunities. We think we can put the types of money we put to work. We think we can drive superior returns if we can continue borrowing at rates at 4% and below. We know that the returns we can create by deploying that capital are far superior, so we continue to plod on. But there's lots to do, we've been very active.

Operator

Our next question comes from Lauren Lieberman of Barclays Capital.

Lauren R. Lieberman - Barclays Capital, Research Division

A couple of things. First was just on the reorder situation. I know you gave a $20 million figure for reorders. But to what degree do you think sales were actually missed? Like was there -- did you end up ultimately being an out-of-stock position in some of your SKUs and important businesses because of the less reorders?

James E. Lillie

Yes, absolutely. I think sales were missed. And I'm phrasing it around $20 million. I mean, you could add $5 million or take away $5 million because how do you really know at the end of the day. But products were not on shelf, and so sales were absolutely missed. If you look at certain product categories, we had fill rates at 80%, where they really ought to be at 97%, 98% on shelf. And so when consumers walk into retailers and the product isn't there, either they substitute or they move on to the Internet or to other retailers to look for that given product.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And so I feel like this quarter or this year's iteration of this quarter is remarkable because you were still able to do the 3 -- the over 3% organic. You had some of that slack pick up in branded and also in JCS. But this has been an issue for the spring season many years, right, where it's like, well, what's going to pop up, as Bill Chapelle referred to earlier. So I mean, is there a concerted effort perhaps to become less reliant on the sort of big-box traditional retailers that are causing you these headaches? And I guess, the percentage of sales at these retailers is so large, it's going to take a lot to change the mix.

James E. Lillie

Well, Lauren, you're absolutely right. And we really take what we believe to be a pretty conservative position when we look at Q2, specifically when we look at June and we look at certain categories. What I didn't touch on that you could say was a missed organic opportunity is as you've read about companies like ours and others in Venezuela having a hard time getting product to finish out our finished products. And so Venezuela was probably a $12 million missed revenue opportunity just from an inability to get raw materials and products into the country to help with our sales. So if you add that to the issue in the States, you really probably have a $30 million missed opportunity. But as you go forward, as I said in my prepared remarks, we just had our strategic planning meeting. And part of our emphasis on targeted growth initiatives on geographical expansion, focusing more on D2C, on our own dot-com sites is to build an even bigger moat and even more diversification around Jarden so that situations like what happened in late June are less impactful every quarter, every year as we move through growing and expanding the business. Martin, I don't know if you have any color.

Martin Ellis Franklin

Yes. I mean, I say another thing -- and this happens in cycles. As you say, you have years where it's an issue and years where it's not. And there are, I hate to say it, sort of factions of retailers who think private label can help them on the margin side, when they really understand fully the dynamics of private label. They end up paying for it on the back end. And we are the ones who bear the brunt of the back end because what happens is, as you know, you have -- you're left with private-label product in stock because it hasn't been moved. You stop buying product that turns at better margins, and then you mark down your private label to get the units off the shelf. And that takes, if you like, the margin away from the retailer who had to stock that inventory themselves. And for us, I think part of -- it's a two-pronged approach. One is diversifying our revenue base both geographically and channel-wise, as Jim said. And the other side of it is continuing to push on the retailers the value of having brands as opposed to private label. Because brands turn, brands have innovation, you can pull off private label for maybe 2 seasons, and then it gets stale because they don't have the development capabilities. And then it's a constant battle. But the reality is it's gotten better over time. It's part of what drives our organic growth is the fact that our brands have taken the greater share of shelf over time. And in some categories, if you get a new buyer who has a great idea, they're going to stock more private label, then you have to go through the reeducation process. It's a vicious cycle, but over time, we've been winning. I'm going to turn it back to Jim.

James E. Lillie

I would add one more thing, Lauren. When this happened maybe 5, 6 years ago, I don't remember exactly when, it happened to Coleman in Q2. And I would say we weren't as mature of a company. And so we expect this to happen, we plan for it to happen. If it doesn't happen, it's an upside surprise. But we run through the quarter looking for the speed bump in the road just from a high level of anticipation. And I think that's why you still seeing good organic growth, good margin expansion, and ultimately, good EBITDA across the portfolio rather than people running around trying to figure out what to do about the quarter at the end of a given quarter.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, that's great. And just one other thing, the margins in JCS, Al commented that gross margins there were down. And so I'm guessing in addition to mix, that was another drag on total corporate. So just a little color there would be great.

James E. Lillie

Sure. So the margins were significantly down in Latin America. And you can even be more micro and just call it Venezuela. And again it comes back to both a mix and a lack of revenue participation from Venezuela that really drove down the overall JCS margins. If you look around the rest of the platform, Canada, Europe, Asia were all up. So it really became a Latin America issue at the end of the day.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And U.S., was it up or flat? Or was it also down?

James E. Lillie

Essentially flat.

Operator

Our next question comes from John Faucher of JPMorgan.

John A. Faucher - JP Morgan Chase & Co, Research Division

I want to talk a little bit about the gross margin performance in the quarter and taking a look at the guidance out for the balance of the year. Can you talk a little bit about how maybe some of the reorder patterns affected the overall corporate gross margin? And then also can you talk a little bit about Yankee Candle, how that's tracking versus expectations? Is that maybe negatively impacting some of the gross margin performance over the course of the year, maybe a little less additive? And then sort of taking that to the next step on Yankee, which is as you lap the acquisition in Q4, do we begin to see a bit of a ramp-up on that business then?

James E. Lillie

Yes. Well, I think if you look at gross margins, a, Yankee is a contributor to the gross margins. But if you break it down a little more finitely, Yankee continues to experience good international growth, which are the lower gross margin because all the products are made in the States -- or most of the products are made in the States, and then shipped out. So that creates a lower gross margin profile. And so the European business particularly outpaced the domestic business. And so you're getting growth at a lower margin profile. We certainly have plans to attack Yankee's gross margins. We're looking at manufacturing capabilities in other parts of the world to meet the revenue growth that is also occurring in other parts of the world. But I think Yankee is performing certainly well-within our expectations. And we continue to have revenue synergy conversations. We just appointed Hope Margala as the new CEO of Yankee. She comes with a wealth of experience, has been within the business for several years, great credibility and I think will be a fantastic leader in the years to come for Yankee Candle. So I think the integration is going along well. As you noted, we don't count organic growth of Yankee until Q4. They are a back half-driven business, and so we certainly have high expectations of performance. But we're having thoughtful conversations, thoughtful strategic reviews with them. They are well on their way to utilizing the Mapa Home & Family business in Europe to help expand their European platform. And we see opportunities in Southern Europe as well. And we are recruiting right now for teams in Latin America and in Asia to continue their growth prospects. So all in all, it's moving along pretty well.

John A. Faucher - JP Morgan Chase & Co, Research Division

Great. And then on -- well, I guess, the other question had been sort of the impact of the reorder patterns and maybe also creating some negative growth margin mix when you look at that on a divisional basis.

James E. Lillie

If you look at Outdoor Solutions, the mix would have helped gross margins if certain products would have sold through or been on shelf at the end of the quarter. But I'm not really concerned about our gross margins. There's so many initiatives going on, whether they be price, productivity, leveraging our scale as an organization, new products coming out at better gross margins. So our outlook remains consistent with the guidance we gave at the beginning of the year, where we think gross margins are going to be. But also we're focused on EBITDA margins. And so managing SG&A, improving gross margins, all to make sure at the end of the day, our EBITDA margins are also moving in the right direction.

Operator

[Operator Instructions] And our next question comes from Joe Altobello of Oppenheimer.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Just wanted to go back to Yankee for a second. If my math is correct, that business was up 8% in the quarter. Is that correct?

James E. Lillie

I don't know if your math is correct, but we don't give individual numbers on organic growth. But it was in line with overall Branded Consumables, so you might be a little high on organic growth.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay. But it did accelerate off of 1Q. And I was curious if that was all weather or there was something else.

James E. Lillie

No. It performed very well. It performed in line with our expectations and really pretty much in line with branded's overall results.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay. And then just going back to these issues in the mass channel, you mentioned $20 million sort of headwind in the second quarter. And you got some of that back in the third quarter. It sounds like you're not going to get all of it back, I would imagine.

James E. Lillie

No. If you just think logically, as you move towards back-to-school, less camping occurs, baseball seasons -- people tend to buy all their baseball equipment on the front end of the season. They don't wait until the end of the season to buy balls and bats, unless they're buying them on closeout. And so some things just organically end. Camping traditionally ends around the Fourth of July. The weather has been reasonably cooperative, so maybe that's got some legs. But we're not building just a shift from Q2 of Q3 of that revenue, but our organic outlook for Q3 and Q4, we think, is healthy. And to the extent that we get a little tailwind from things that might have sold through in Q2 and there's some replenishment, we'll take it.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay. And just one broader question on the mass channel. It sounds like the issues there were sort of isolated to a handful of retailers. How would you describe that mass consumer? Are you seeing any improvement in terms of demand trends at all?

James E. Lillie

Look, I think as the economy gets better, and I said this before, people have more choices. They don't have to do all their shopping at necessarily a particular big-box store versus another. And you see performance out of our regional specialty sporting goods businesses that are doing very well, some of the larger regional players, like Academy, that are expanding their store footprint. So we're seeing broad-based growth as opposed to particular growth at any one given store. And so I just think with more available consumer credit, with people less relaxed -- or more relaxed about the possibility of losing their jobs, you're seeing more distributed spending as opposed to a more concentrated spending at any given retailer. If the product is not on the shelf, you can't buy it there.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Right, exactly. And then just one last one in terms of modeling, would you expect the third quarter to be your strongest in terms of organic growth this year?

James E. Lillie

I think you're going to -- look, the problem about Q3, Q4 is in my mind it's one big quarter because there's so much that ships September, October. And as we're modeling it out, they're reasonably the same size. But again you get a lot of shipping at the end of September, so that will drive really where organic ends up. And Al and Rich and Rachel can help you model out a little more thoughtfully than that comment. But they're pretty equal.

Operator

Our next question comes from Michael Steib of Crédit Suisse.

Michael Steib - Crédit Suisse AG, Research Division

I was hoping you could give us a bit more detail about Project Lean, I think you call it. What's the sort of scope of the potential savings opportunities that you've identified and over what timeframe do you think you can achieve that? Are there any sort of particular milestones that will occur as you go through this program? And what are you going to do with the savings? Are those likely to flow through to the bottom line? Or are they generally intended to be reinvested?

Alan W. Lefevre

Yes, this is Al. We presented Project Lean in our strategic planning meetings this past week and basically outlined some things that we're going to be driving against. I think that back-office consolidation, treating every dollar as your own are some of the key things that we need to do to basically move lean through. But the idea here is we're in the planning phase during the next 4 to 5 months, we'll build in some of the savings into our plans for 2015. We've got some ideas on back-office consolidation, places we can share. We share platforms today already. We share platforms with all the Jarden sister companies in Canada. We do similar things in Mexico. We think there's other opportunities across the globe as well as in the States. So we'll continue to flesh those ideas out. We'll move into the implementation stage in 2015. We indicated that this was a 3-year initiative. We do expect those -- obviously the savings from that, to flow through to the EBITDA in the out-years.

James E. Lillie

Michael, the other thing you asked about is would we be using the proceeds or the savings to reinvest in the brands or would it drop to the bottom line? The intent is that most of it drops to the bottom line. Our investment level now is about 5.7% of revenue. Obviously, certain brands, certain products, it's higher, other ones, it's lower. But on a consolidated basis, we've doubled the amount of investment spending over the last 5 years and we're pretty comfortable at this 5.7% level. And so our expectation would be that it will ultimately go to improve our EBITDA margin.

Operator

Our next question comes from Kevin Grundy of Jefferies.

Kevin M. Grundy - Jefferies LLC, Research Division

Jim, wanted to come back to Yankee. I guess, a lot of the focus seems to be on international. And I would agree, the runway there seems to be long. But there seems to be less commentary recently on the domestic opportunity. And when you guys first did the deal, the commentary was that you weren't in your largest retail customers as of yet. Is that fair? Is that less of a focus? Or is that still something that you guys are actively pursuing?

James E. Lillie

No. Look, I think that across Yankee, we're focused on a good, better, best strategy. We're focused on a channel strategy. Obviously, when I talk about partnering with other Jarden businesses, I tend to naturally think about international expansion. But you shouldn't misconstrue my comments to say that we're not focused on growth opportunities in the Americas as well with existing customers and with people that we're not doing business with.

Kevin M. Grundy - Jefferies LLC, Research Division

Okay. And how far away -- how many years out or quarters out do you think you are from contemplating putting a plant in Western Europe?

James E. Lillie

We're contemplating it currently. We have assets on the ground. And we're looking at capacity analysis and balancing overhead absorption and all the things that you would think we need to do. But we want to make sure the timing is right. The investment would be relatively de minimis as things go. Our estimate would be less than $20 million. And so it's not going to change our 2% to 2.5% CapEx budget. As certain other products kind of come offline, new products come on -- or new projects come online. So we'll be talking more about that in the coming year or so.

Kevin M. Grundy - Jefferies LLC, Research Division

And just one more question, Martin, from a capital allocation perspective, and you guys have a long history of being value buyers, why aren't you guys more actively buying the stock back now at 12.5x PE and the group's at 17x, 18x? Don't you feel like your stock is undervalued? And if so, why aren't you buying it back more aggressively?

Martin Ellis Franklin

Well, we've been buying back stock in the first half. I forget the amounts because we've disclosed them. But we have been buyers. We've also been buying businesses. So capital allocation is about opportunities. And the one thing you should know without -- just as a practical matter, we've been in a quiet period for a while so that's closed a window. But you're right, we opportunistically buy, the stock came down in the quarter. But the reality is that we've had some pretty interesting opportunities, which you will hear about in due course for allocation of capital. And so we have our reasons. But let's be honest. We have bought 3.5 million shares year-to-date. It's not like we haven't been active in the market. We bought over a couple hundred million dollars’ worth of shares. And look, we're not afraid to buy back our stock. We like to do it. And I have -- we have 2 things in mind. As you know, as we get to the end of the year, we want to make sure that our debt levels are at our stated goals of 3x our debt-to-EBITDA ratio. And at the end of the day, as you know, we generate the bulk of our cash at the end of the year. So we've been measured in how we've done it. But we'll see how the markets behave in the second half. But obviously, if the market is weak, we will be opportunistic in the market. If they're strong, we've got plenty uses of our cash for things that grow our business. So we'll see what happens.

Operator

We'll take our next question from Nik Modi of RBC Capital Markets.

Nik Modi - RBC Capital Markets, LLC, Research Division

Just a few quick questions for me. Generally, you guys have been pretty good on understanding kind of what's going on with the consumer. So I was wondering if you could just give us a state of the union on your perspective in your key markets. And then the second question is the tuck-in acquisition, I think you did one in Italy recently that was a bolt-on to the Yankee business. So just curious on that deal and how that fits into the broader landscape in strategy.

Martin Ellis Franklin

So second question first. Millefiori is an Italian company. But it's really a Q3 closing. And the reality is it helps us with our good, better, best strategy that you heard from Jim on Yankee Candle. It's a higher-end, higher price point product, Italian design, but it's very small. But we think that there's lots of opportunity, particularly with the combined resources and efforts from Yankee Candle to create both opportunity for Yankee Candle in Europe and opportunities in the Americas for Millefiori. I'd say -- I would like to also say the CEO and Founder of Millefiori, who's continuing to work with us following the acquisition, joined us on the strategic planning week. And it was really heartening to see he was very not just very impressed but really felt welcome to be part of the Jarden family. And I think it energized the whole organization both on the Yankee side because it sends a great message to our team there about our commitment to investing in their business, but also I think to Millefiori because they really saw the opportunities of being part of the Jarden family.

To answer your question on the consumer, it's really as Jim had said. And I think that the reality is the consumer is relatively healthy today but for lots of different reasons, low rates, refinancings, job growth. But at the same time, it's measured. I think there's a lot of wariness about the fragility, if you like, of the recovery. There are a lot of events going on in the world, all relatively small individually, but there seems to be the feeling of a lot of -- chaos maybe too strong a word, but there is a lot of feeling that there's risk out there. And I think that, that's kept growth to be modest. Having said all of that, there's real growth. And we're benefiting from some of that. We see it in the activity of retailers. We see it in the mix of the products that we're selling. There is a European recovery going on. There is a European effort a la America in terms of cheap money. And obviously, we've joined that slipstream in the quarter with our euro offering. But that inevitably has an impact on consumer demand in Europe as it's intended to. So that's pretty good for business. At some point, it will also turn into inflation at some point, which will also be good for business. So we feel pretty good about our outlook.

Nik Modi - RBC Capital Markets, LLC, Research Division

And then just one last question for me on Yankee. My understanding is that you have this multiyear agreement with Palletways to distribute the business in Europe. So just curious when that will actually start hitting the marketplace...

James E. Lillie

Sorry, a multiyear agreement with who?

Nik Modi - RBC Capital Markets, LLC, Research Division

Palletways, the distribution company in Europe.

James E. Lillie

Honestly, I'm not familiar with that name. And it is probably pretty small. So I mean, we can talk about it offline. But it's not a name that I'm familiar with.

Nik Modi - RBC Capital Markets, LLC, Research Division

Well, I guess, the broader question is the distribution in Europe more broadly, is that going to be a third quarter event, a fourth quarter event, any perspective around that?

James E. Lillie

Well, the distribution in Europe is a daily event. We have a new team. We've hired a very talented woman to run the EMEA business. And she is building a team. As we talked about earlier, we're taking the COGS savings and spending it in SG&A, building out a team of an incremental 50 or so employees to build our European business beginning in '15, more results expected in '16 and '17. So we feel good about the white space for growth in Europe.

Operator

Our next question comes from Chris Ferrara of Wells Fargo.

Christopher Ferrara - Wells Fargo Securities, LLC, Research Division

I wanted to, I guess, touch on SG&A first, just because it's a little bit volatile. If you go back to first quarter, SG&A in dollars was up almost like $87 million year-on-year. Now this quarter, it's up $63 million year-on-year. So it's a pretty good improvement in pace. Can you talk about what drives that? I mean, the $63 million seems more normal, right? Yankee SG&A in a quarter in the year ago was like $50 million or something and your incremental D&A is like $10 million, so it's logical. But was there something funky in Q1 that made it be so high year-on-year relative to Q2?

James E. Lillie

Yes. Look, if you x'd out Yankee, our SG&A of legacy Jarden, we'd be flat to perhaps slightly down. Yankee has a large SG&A component. And as I just said on the prior question or the prior call, we were spending SG&A in Europe building a European team, adding 50 people, so those expenses are starting to roll in. You just have a retail footprint that represents about 5% of Jarden's overall sales, where there's a higher SG&A component. So we're comfortable with the outlook. It doesn't -- on a comp year-over-year basis, it may look a little hinky, but it's in line with our forecast and with our plan. And certainly, Rachel and Alan and Rich can walk you through modeling to help you get a better understanding of that after this call.

Christopher Ferrara - Wells Fargo Securities, LLC, Research Division

Got it. And I guess, back to gross margin for a second. The $150 million to $200 million guidance range that you guys have out there, obviously that's a pretty strong number. When you think about when you get to Q4, you will have lapped Yankee. So the Yankee accretiveness or contribution to year-over-year gross margin improvement, I'd imagine, flattens in Q4. So what gives you the confidence in the $150 million to $200 million for the full year? Because it seems like you need a pretty -- like an acceleration of that year-on-year pace into Q3. And is that some of that order changing and replenishment? If you could talk a little bit about that, that would be great.

James E. Lillie

Yes, the gross margins are mapped out. They're not giant buckets. There's a bunch of little buckets. The gross margin expansion is focused on price, productivity, efficiencies in the platform, new products replacing old products at a higher gross margin. And so as we map that all out, we go down to the brand and SKU level to give us a pretty clear picture. And so as it stands, having just completed our reforecast, we're sticking with the gross margin expansion numbers that we've talked about.

Operator

We only have time for one last question. Our final question comes from Andrew Burns with D.A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

Just one follow-up on Yankee Candle. Sorry, there's so many questions there, but it's your newest business. Just curious in terms of given the different cadence of that business and the owned retail footprint, was hoping you could talk about your confidence in that U.S. retail business heading into the holiday season. How much of the sort of Jarden DNA have you been able to integrate into Yankee? Is there going to be...

James E. Lillie

Look, I think the great thing about Yankee Candle is its omnichannel presence. It's got a fund-raising business, a very robust dot-com business, it's got a good wholesale business, and it has its own retail store footprint. And so that, coupled with our international expansion -- it is a back-half weighted business, but we feel good about the direction the business is growing, where it's growing organically, where it has opportunities. And obviously, the Jarden DNA is something that we're very much on top of. Culturally, as a company, they are very close to us. And so there's been a great meshing of people, got a great senior team, as I mentioned. We promoted Hope Margala to be the new CEO. She is very strong and has deep roots in the business. So we feel good about the direction. Who knows what the weather will be, who knows what some of those outside of our control things are going to be? But we're planning on growth. And we think the retail footprint is healthy. But we think the other channels are equally good as well.

Martin Ellis Franklin

I think that completes our call today. We look forward reporting to you on our progress in the next quarter. But until then, thanks very much for your time. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect, and thank you for participating.

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