© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Michelle and I will 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. All lines have been placed on mute to prevent any background noise. After the speakers’ prepared remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, August 7. Thank you.
I would now like to introduce Mr. David Prichard with Spectrum Brands. Mr. Prichard, you may begin your conference.
Thank you, operator and welcome to Spectrum Brands Holdings fiscal 2019 third quarter earnings conference call and webcast. I am Dave 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 2 you will 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 3 and 4, you will 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.
Thank you, Dave. And I just want to thank everyone for joining us this morning. As our fiscal 2019 draws to a close, I am very proud of our associates here at Spectrum Brands as we are on pace to deliver 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 line. Spectrum employees have risen to the challenge and are delivering on our goal of a year 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 have 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 $303 million of cash to our shareholders through share buybacks and dividends.
On our second quarter call, we indicated we have 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 have actually started the initial execution of what I am calling our Global Productivity Improvement Plan. As we prepare to enter 2020, I am 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 and 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 to our shareholders.
If you could please move to Slide 7. As we entered the fourth quarter, while the businesses do face a number of headwinds, we have got inflation associated with input costs we have got tariffs that are in the news almost everyday, distribution and 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 this year end. As you will hear more details from Doug about our results, I will simply focus my comments on how our teams across geographies, functions and business units 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 multi-year 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 number one 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 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 8, we continue focus on building a faster, smarter, stronger Spectrum Brands in the future. And after launching a detailed global productivity study, our teams have identified four 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 the substantial portion of these savings will be reinvested into R&D, marketing and technology-enabling capabilities, drive growth and improve our cost position. Our Spectrum 2020 guiding principles are vision, where we are 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 chain that has been refreshed with new talent and that are focused on operational excellence we position our company for improved sales, earnings and sustainable free cash flow growth.
With that introduction, I will now turn it over to Doug to go over the quarter.
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 a 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 changes 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 was driven primarily by HHI DC consolidation and divestiture activity in the prior year.
Now to business unit results beginning with Slide 12 in 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 maybe 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 to 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 planned to introduce new products benefit from price increases and continued 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 hair care distribution losses in the mass channel. These were partially offset by growth in Europe, primarily from e-commerce and UK food and 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 have said before, we are resetting HPC in fiscal 2019, rebalancing its costs 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 in 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 very strong 15.7%. Significantly higher net sales were attributable to continue 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 and 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, a 2.6% net sales decrease was driven by unfavorable weather conditions during most of the quarter, with produced sales in household insect and outdoor controls being partially offset by growth in repellants 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 on 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 pending to be between $60 million and $70 million relating to 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. Finally, for adjusted EPS, we use a tax rate of 25% including state taxes.
Thank you. And now back to Dave for Q&A.
Thanks, David and Doug. With that, operator you may now begin the Q&A session, please.
[Operator Instructions] Your first question comes from the line of Olivia Tong with Bank of America.
Great, thanks. I want to actually start similarly to the way that I started last quarter, which is just about free cash flow; obviously we’ve got a lot of moving pieces here and I know that first half is usually used, but you are starting off of a lower base on a year-over-year basis, so can you just talk through the different puts and takes there to start? Thank you.
I will let Doug take that first one.
Hi, good morning, Olivia. Yes, the free cash flow - we are not guiding on this year principally not because we don’t want the clarity and transparency, but because at the time of the sale of the two businesses in January. One in early January; one in late January what would traditionally have run through working capital will now run through gain or loss on sales. So, it’s a confusing story and at the end of the year we’ll lay out all of the pieces for you. I can tell you that we’re on track against our internal expectations on free cash flow and have obviously captured all of those proceeds already and they’re reflected in our net debt numbers and a little bit of cash we have on the balance sheet at this point. So I gave you outside of that then the elements that you can use to - for your modeling and if I were – as I think about it, I like to model what I think the next year might look like based on information we have coming out of this year. So that’s CapEx, that’s depreciation as adjusted for the debt pay down that is a restructuring cash – cash taxes, we still expect to be between $40 million and $50 million on an annual basis going forward. So, if that’s – hopefully that’s helpful, if not, please reach out to Dave or Kevin and they can continue to help.
The only thing also I would add, is we did pay off over 50% of the debt of the company; we do generally a lot of free cash in the back half of our year, so we’re starting to collect the cash now, and so, our liquidity position will build as we finish out this year. And I think if you just look at the debt instruments we’ve retired thus far and we may do some more in the future. I think you can quickly come up with this $130 million, $150 million bucks of reduced interest expense going forward of which we’ll start to see the benefit when we report the third quarter results, next time we talk to you.
Got it. Thanks. And then just on sales, clearly quite a bit better than we expected across the division pretty broad based, so – can you go over any timing shifts that we should be aware of? How you view your in-store inventory levels at this point? And then in terms of specific divisions, clearly appliances was better, can you talk about how sustainable this is? What changes you’ve made so far to the business to reinvigorate it? Thank you.
Yes, look I think across – hopefully you are getting a consistent story. I took this position just over a year ago and we obviously had an unfortunate quarter to report to you then. Since then we’ve tried to really get the company back to what I call vision and clarity focus and that means, we want to eliminate what I view is non-strategic spending, and we want to increase strategic spending, and so what I am trying to do is push – steer the ship toward higher levels of investment in new product development innovation and put more money into A&P and marketing and really start to drive the top line. Again, look, we don’t want to over promise anything for 2019. 2019, as you remember, I build it as a year of returning the company to stability and planting the seeds for growth in 2020, but clearly we are planting those seeds, and you know, look I would tell you on the bottom line, we could be reporting much better numbers, but we are continuing to invest in earnings dilutive activity in the short run which is higher spend on R&D and marketing.
Olivia, from a timing perspective, I would say that the Appliance business is - you saw some improvement, we are beginning to lap some of the negatives from last year and we’ve got a new management team in place and we’ll have probably a better update in the - on the next call and the progress they’re making, but they’re they are highly focused on not just revenue, but profitable revenue. So, I wouldn’t expect any surprises going forward coming out of there between now and then. And then from Home & Garden perspective, I would say that this year is the weather’s been generally better and POS particularly in the big box channels has been pretty strong so far. We still have 70% of the season in front of us. So a lot to go yet, but relative to last year and to your timing question, I would say for Home & Garden a little better seasonality.
Your next question comes from the line of Bob Labick with CJS Securities.
Good morning. Congratulations on some nice growth. Yes, let’s keep it up. So I wanted to kind of talk a little bit about that and then shift to online strategy as well, maybe merge the two, but can you talk about how you view each of the segments in terms of over a medium or longer-term organic growth potential, and then, one of the key drivers you are pushing – and you mentioned in the prepared remarks a focus on e-commerce particularly in PET, so maybe talk a little bit about the online strategy as you shift there for growth as well?
Yes, in the last 12 months we’ve made some key hires in the digital space, not just digital marketing, but we’ve got some key talent on board right now that really understands algorithms, that understands how to – again I think in the early days, we were very much focused on how do we fix our search, how do we get good content and I think we have done a pretty good job there. I don’t think we’ve done a really good job of getting a return on digital spend, and so, right now we’re in the midst of kind of optimizing that digital spend, but we are doing it with people that actually speak the language of the Amazons of the world and our other e-com partners and we’re partnering with them, and quite frankly, we’re getting better returns on the capital we allocate there. So, I think, part of my new role is – we spent kind of ten years – I was doing a lot of external capital allocation. Right now we want to get internal capital allocation to a much - to a much higher rate of return and we are doing that on the digital side. Clearly on your first question, I mean Appliances continues to migrate online pretty rapidly. We are definitely seeing a meaningful increase in e-com and on our PET business as well. Home & Garden is small, but the growth rates are strong; HHI is - that’s a smaller component. Any time you get liquid in a bottle like on our Home & Garden side, you’ve got heavy products like hardware and locks. You typically doing less online, but we continue to step up investment there, particularly on the digital lock side. We were one of the first to market with our Kevo products, and I see just a very low penetration rate there, with massive white space and I see very strong end market growth. And we see adoption rate low at the moment, but the growth rate is exponential. And so I think, you’ve heard, Doug talk about it. I was recently in Lake Forest with our HHI team and I’ve just – we are revamping some of the merchandise, we’ve put out, we want to do not only a better job, explaining our smart key technology to our customer. But also trying to bring clarity at point-of-sale and increase the customers confidence at the point of purchase. Because, we think digital locks they’re here to stay, they’ve got a great tailwind behind them and we want to continue to be the market leader there and quite frankly, we think that’ll grow whether we’re in expansionary times, recessionary times given the tailwind here in the adoption rate. We really want to maintain our leadership position. So you’ll see a lot more of that and you’ll probably see a lot of news release in this summer and new products that were coming out with to further that activity.
Okay, great. Thank you for the color. And then just one other quick one, you mentioned obviously, a whole new team or mostly new team at HPC Executive level. Could you talk about the priorities you’ve given to them? Is it – I don’t want to put words in your mouth, what were the priorities and the charge that you’ve given to them going forward?
Listen to be blunt I just think we got off track in that division. We tried to do too many things, to too many people with too many SKUs. Look, we are very, very good at procuring product. We are a low cost provider. We marry that with some innovation and we have great brands. And we’ve really just got to get back to our core. We have got to get the right product to the right customers at the right prices and that’s what we have done for a decade. And I think we just kind of - we kind of lost focus. So it’s restoring that focus. Listen, there’s some complexity in that business that we are going to drive out, there’s more efficient ways to do the things and so, we’re doing that. But listen, there is no question on the profitability line this quarter, we probably could have doubled it for reporting purposes, but we would have been pulling back levers on marketing, on innovation. And that’s kind of the new theme; I’m just not willing to sacrifice short-term numbers that would rob us of future growth. My mission from 10 years ago was to create a sustainable free cash flow enterprise, and you just have to plant this - no better time to plant seeds for growth in the current moment, it’s just those sometimes are expensive seeds. And so they have a mandate to continue to invest behind innovation, you’ve got to bring new products that answer consumers’ needs and convenience. And you’ve also got to let people know about why those things help their – help them have better experiences in the kitchen or on a personal – on a beauty side, you’ve got to let them know that through smart advertising. And so, those are different mandates that were not in the DNA of the prior team, it is in the DNA of this team, but they also have a dual mandate, which is to really streamlined supply chain, operating expenses, so that we can reinvest in more strategic activity. I would tell you that are kind of the main new vision, clarity and focus being brought to that business unit.
Your next question comes from the line of Faiza Alwy with Deutsche Bank.
Yes, hi, good morning. So my first question has to do with HHI. Can you talk about your outlook for that business now? I know when we last talked about it in February; there was some concern about housing and remodeling slowing. I think since then things have improved. So I just wanted your updated take on, how you’re thinking about the market?
Yes, I think you’re right. Look, we definitely saw a pre-rapid and deceleration in demand, I would tell you, I think it was November 2018 when I first partially noticed it and it was very sluggish through December and so that had me quite concerned is a real headwind. Clearly, I think the pivot by the Fed, lower rates from the market and the tenure trading it 2.5% and pushing lower now given the - given macro events is lowering mortgage rates. And the housing market has just become accustomed to very low rates. And so you’re right, we do see a pickup in new home sales, which we think affects about 25% of our total top line in the HHI division. But we remain the dominant player in the remodel space. And again, I think right now it will be great, we see with the builders is, there is actually still a lot of pent-up demand. And you see the millennials wanting to get into housing. It’s affordability and it’s a supply issue. And so, quite frankly a lot of our builder partners are now looking to be – how do we create more product in that $200,000 to $500,000 zip code and that quite frankly would be extremely good for us, if we could see kind of the new home builds be in that range, because they also tend to be the early adopters of our digital locks. So look again, we don’t want to get over our skis, we have a tough comp in Q3 for the HHI unit. We are just billing – we are billing 2019, as we’re getting back on our feet, we’re stabilizing all our business units, we want to take the right long-term approach to investing now for better growth in 2020. But I’m feeling a lot better about the outlook for HHI as I talk to you today than I did 3 months ago.
Okay, great. And then just a follow-up on like HHI EBITDA, so I know it accelerated relative to last year, but last year was a very easy comp from a margin perspective. And if I look at it on a 2-year basis, it’s still decelerated. So could you talk about some of the puts and takes? Is it a mix issue, is that cost inflation, is that more investments, so just a little bit more color around the EBITDA, if I compare it to 2 years ago?
I am going to pass this one to Doug, if that’s okay.
Primarily related to input cost inflation, little bit of – a little bit of tariffs, we’ve gotten some pricing across the board, across some of our categories there, but it’s generally driven on the - on a cost side in the short run. And some of the initiatives that David talked about earlier in his prepared remarks include manufacturing and supply chain improvement opportunities and we see some in HHI.
Your next question comes from the line of Jim Chartier with Monness, Crespi, & Hardt.
Good morning. Thanks for taking my question. Hi guys. On the investment spend your first – can you give some more – a little bit of color on how much it was weighted to first half versus second half of this year? There was a more weighted to first half and should we see less impact on EBITDA margins in the back half?
It varies by division. So I can tell you, look with 70% of the lawn and garden season left, and we’re off to a reasonable start, we’re actually going to ramp up spending. So that would be a situation where we actually see marketing increase, but again it’s increasing, it’s supporting the appropriate amount of sales and profitability growth. Plus, we have distribution wins and we want to support those for our retailers, customers. I would say on the appliance side that was probably more weighted in the first half things like Manchester United are not inexpensive endeavors. Doug, I don’t know you want to add some more color?
Now I think that’s right. And I think the - later in the year appliances will ramp up a little bit as we headed into the holiday quarter, which is our first quarter next year, but some of that spend will be committed and happen ahead of time. And then on the HHI business they are relatively stable through the year, a little bit heavier in the back half, perhaps, again given their seasonality and pet is pretty steady state.
Great. And then you talked about the detailed study for improvement in efficiency opportunities. Do you plan to flow through most of that to the bottom line or you plan to continue to reinvest into your growth initiatives?
Yes. Look, I am actually very excited about this. I want to wait and get some more tangible evidence in our hands, before we kind of talk to you more broadly about it and we intend to do that next quarter. I think you should think about it as, no stone is going to go unturned. We - if there is non-strategic spend or spend that is not value added or if there’s redundancies or too much manual procedures and we can become more efficient. It’s a pretty comprehensive study; I think a lot of it will come on the procurement side. But again, I want to balance it, I think we will draw a lot of it to the bottom line. But I want to make sure we take a decent proportion of it and reinvest in the business. I want us to get much more in line with top performing CPG companies in terms of marketing spend, innovation and new product development. We - I’m bent on steering the ship towards a much healthier vitality, underlying all four businesses. We must make investments in 2019 to deliver growth that shareholders deserve in 2020 and beyond.
Your next question comes from the line of Sam Reid with Wells Fargo.
Hey, guys. Thanks for taking my question. Look, it’s exciting to see all the innovation coming online across your platform and across all the segments. Could you give us a sense those to what proportion of your sales this year are coming from new products versus existing products and maybe how that compares to prior years?
It’s never enough. Doug you want to hit it?
Yes. I don’t have specifics to provide to you, Sam, because they vary across the businesses. But our vitality rate in general is over a 3-year period is in generally in the high teens area and has been increasing in the last couple of years and will continue to increase a little bit this year.
Got it. Now, that’s super helpful. And then if I could sneak one on HHI here. You guys mentioned in the prepared remarks, relatively low household penetration rates across that bolts and smart lock or electric deadbolts and smart lock products. Could you give us some numbers around there though and what penetration rates might be today versus where they could be over the next 3 to 5 years?
Penetration in the U.S. is sub 10%ish on the smart lock category. Our overall…
Use between 5% and 10%, that’s as narrow as we go.
And then our overall electronics business which would include TouchPad and other non-smart, non-connected, so it’s both connected and non-connected, it has also a little under 10% of around, around 10% of our total business.
Just listen you have a whole generation of customers that is used to just living on their phones. And now they’re buying their first home, to be able to run that house on their phone, to access the house to lock the house, to let somebody deliver something, or to let a relative in or it’s just the future and we want to be on front.
Your next question comes from the line of Joe Altobello with Raymond James.
Thanks. Hi guys, good morning. So I did have a few questions around the investments you guys are making this year. You talked about that for the last couple of quarters, including this morning. And if I look at selling expense for example on R&D expense, both are flat year-to-date, so it seems like all of that investment is going to other areas of marketing. Is that the case and if so, can you help us quantify how much of a step-up in marketing you’re expecting in your EBITDA guide for this year?
Joe, there are actually those couple of areas and that the piece that you don’t see, which is reprioritization of gross to net spend. So we’re focused on all of those revenue driving, spend activities. And I will tell you in the first or in the second quarter that we just came off. We did increase investment in Home & Personal Care and we did in the Home & Garden business and we are planning to - as planned, both of those are as planned. The other two businesses as planned to will, were about flat year-over-year and we’ll see step-up in investment as we go throughout the year. But as it relates to those individual line items, they vary by business depending upon what we think is the best way to reach our consumer.
And you will hear more of this theme, as we get into kind of Q3 and we talk to you about some additional shareholder enhancement vitality at initiatives that we’re undertaking. Again, I think you could parallel at some of our earlier comments about getting a very detailed dashboard of non-productive spend and so there’s a lot of dollars that are being recycled inside of these units. But to Doug’s point, I mean we could have probably reported twice the profitability of the appliance unit this quarter, if we hadn’t stock with our discipline to invest in innovation and marketing, in the phase of a challenge quarter profitability wise particularly in that unit. So we are sticking with a discipline.
Okay. So for the full year, is the step up $20 million to $30 million, would you call it this year?
That’s not an unreasonable. The high end of that, it is not an unreasonable area.
And that’s recurring right? That doesn’t come…
Yes. That will go on forever – that would not only go on forever, but as David mentioned, as we get through these productivity and efficiency initiatives, some of those savings we’d like to reinvest in future growth. And obviously some of that investment will go in these areas.
Okay. And just one last one, if I could squeeze it in for David, I guess how are you thinking about uses of cash given that you paid down a ton of debt already, you bought back some stock in the second quarter. It sounds like you want to pay down more debt in the back half of this year. Could we see more stock re-purchases or you done for this year and how you think about M&A as well? Thanks.
No. Listen, I appreciate that. I think the greatest single use of cash that has the greatest single return on it is buying back our share. However, I just lived through a 12-month period of time where, we went through tremendous disruption operationally and we transformed the company through divestitures and de-leveraging. I am committed to delivering a stable Spectrum Brands this year that has vision, clarity, focus and ends 2019, it is as the smarter, stronger - faster, smarter, stronger Spectrum Brands in the future. We – I believe I have talked about wanting to get to kind of just more consistency, just real rhythm and cadence in the underlying operations and we’re making progress. I mean if you just look at every metric from kind of three quarters ago, two quarters ago and this quarter we are absolutely moving in the right direction. We still have plenty of wood to chop, I don’t want to get out over my skis, but I think we - look, I’ll tell you, we are starting to look at tuck-ins again. So I don’t see anything big on the horizon, but if we can do tuck-in acquisitions that are very, very accretive that fit with our existing business units, and are highly accretive and synergistic, we’ll look at that. But it’s going to have to be very, very compelling, because buying our own shares at these prices, like I said, is probably the single best use of capital allocation we can make.
Your next question comes from the line of Karru Martinson with Jefferies.
Good morning, guys. On yesterday’s Energizer call, they talked about the VARTA dispositions of that they’re being forced to make and the slightly lower proceeds coming from that, expected. Is there any liability for you all as part of that?
So we sold the entire battery division for $2 billion. We have reserves $200 million, should that we needed. And we will wait to see when they complete the sale. But no, we’ve booked and we’ve disclosed that $200 million possible true-up. And that’s capped it – does a cap of $200 million. And so, hopefully, they do better, but we’ll have to work – we will have to wait to see how they progress that M&A discussion, and who is the buyer and at what price.
Okay. And with the material debt pay down here. How should we think about pro forma interest in on a go forward annualized basis?
If you – we will be filing the Q at the end of the day today. You’ll see the debt table in there, it’s very straightforward now it’s - so you’ll be able to calculate it on an annualized basis.
Okay. And just lastly, there has been some talk for other seeing some gains in the Home & Garden space for roundup equivalents. I was wondering if there was any sort of a lift for you guys in lawn and garden space?
Look, we have expanded distribution there. It’s never enough for me, I want more, I think our products have better efficacy, I think our products are better for a lot of things. I have been warned about the comments I can make it even litigation against Monsanto and glyph sate. But Spectracide is an amazing product, it’s a great product. We want to tell more people about its benefits and the fact that we think that it’s a superior product offering at a great value price point. We want to continue to get that message out there. So that’s why we are stepping up our investment marketing.
Okay, operator. It looks like we have one more questioner, so let’s take that and then I think we will close down the call.
Your final question comes from the line of Carla Casella with JPMorgan.
Hi, I wondered if you could give us an update on any expected impact of tariffs, if they are – if changes are made?
Yes. We would prefer both sides reach a consensus. They think that would be the best interest of the globe and ourselves. I think that depending on how things progress this weekend, you know, look, we went through this fire drill last fall; we were prepared to pass the increase on January 1, we know it got extended to March and here we are. Obviously, this week has injected a lot of volatility; I don’t know any more than you know, but I think the biggest problem for us would be, if demand elasticity, I mean, yes, if it were from a mechanical standpoint we receive Chinese product and we would have to write a check to the United States Treasury, but, we are going to have to pass that on, and, so ultimately the consumer is going to pay for it, where we have to have go through the fund that we don’t enjoy doing with our retailers. But if we end up in a tariff situation we’ll pass it on and we’ll see where the final demand is. But I don’t think we are alone in this, and then you know, thank god, the majority of our businesses are vertically integrated on this side of the globe.
Okay, great. And then you mentioned the appliance, personal care appliance lost a little bit of share, when do we cycle that? Was that something that’s just started this quarter?
No, it began last year in the first half of last year, and so will continue to lap it as the year unfolds, but thinks – comps should begin getting better in the U.S.
Okay. And then just on the – now that you have completed the divestitures and brought your leverage down and you expect to get to 3.5x, is that a good long term go forward level? And were that and all of your kind of cost savings and business investment initiatives? Do you think are you starting to look at maybe adding to the portfolio with another leg of the stool?
Yes, I think in my earlier remarks I said look I really want to see consistency in the rhythm and cadence of the underlying earnings of the company. We are looking at small tuck-ins but these are not anything that would move the needle. I think our stock price is very attractive relative to the value of what people want for private assets. So it’s got a high hurdle to get in here, and I think we want to deliver what we promised this year. We want to deliver the – keep the balance sheet down, but, I think as we get into some greater detail, we can talk to you – we are excited to talk to you more about it next quarter. If we can really start to drive the EBITDA line, going into 2020 et cetera then it’s obviously free cash flow improves and we would generate a lot of free cash over the remaining life of that buyback program, and we would like to take advantage of it. So it’s just – we are looking at a lot of things and we will continue to be opportunistic is the best I can.
And on the leverage you think is the 3.5x go forward or would you be willing to take that up or does that need to come down more?
We like 3.5x given what happened last year and that’s where I would to see us run on a long-term basis.
Okay, operator. Well, thank you David and Doug. We have exhausted our questions and nearly reached the top of the hour. So, we will go ahead and conclude our conference call. On behalf of Spectrum Brands, we want to thank all of you for participating this morning in our fiscal 2019 second quarter earnings call. Have a good day.
Thank you for participating in today’s call. You may now disconnect.