Good morning. My name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spectrum Brands Fiscal 2019 Second 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. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. Should anyone need assistance at any time during this conference, please press star, then zero, and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, May 8th. Thank you. I would now like to introduce Mr. David Prichard with Spectrum Brands. Mr. Prichard, you may begin your conference.
Thank you, operator. Welcome to Spectrum Brands Holdings Fiscal 2019 Second Quarter Earnings Conference Call and Webcast. I'm Dave Prichard, vice president of investor relations for Spectrum Brands and your moderator for today's call. To help you follow along with our comments, we have placed a slide presentation on the event calendar and presentations pages in the investor relations section of our website at spectrumbrands.com. This document will remain there following our call. If we go to the presentation and we start with slide two, you'll see that our call will be led by David Maura, our Chairman and Chief Executive Officer, and Doug Martin, Chief Financial Officer. David and Doug will deliver opening remarks and then conduct the Q&A session. If we turn to slides three and four, we'll note that our comments today include forward-looking statements, including our outlook for fiscal 2019 and beyond.
These statements are based upon management's current expectations, projections, and assumptions and are by nature uncertain. Actual results may differ materially. Due to that risk, Spectrum Brands encourages you to review the risk factors and cautionary statements outlined in our press release dated May 8th, 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 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. I will now turn the call over to our Chairman and CEO, David Maura.
Thank you, Dave. Thanks everybody for joining us on the call today. In many ways, this was a very good quarter for our company. In January, we generated just under $3 billion of cash proceeds from the sale of assets. We rapidly allocated a portion of these proceeds and paid down $2.4 billion of debt while returning $250 million to our shareholders through share repurchases. We will distribute approximately $86 million this year to shareholders in the form of dividends. As a result of these actions, our gross leverage, which peaked at nearly six times in December of 2018, just a short while ago, has been reduced at the end of the second quarter to a net leverage of approximately 3.9 times. We expect to finish the current fiscal year with net leverage of approximately three and a half times.
These actions have resulted in a much stronger Spectrum Brands with a much stronger balance sheet. They're paving the way for a material free cash flow growth in 2020 and positioning our company to end 2019 in the strongest liquidity position we've been in in recent history. Through these accomplishments, we are completing a period of significant transition, and we are now entering a period of stability and renewed focus. Similar to our first quarter, these second quarter results were in line with internal expectations. We were pleased with both strong reported sales growth. More importantly, we're very happy to deliver organic revenue growth of 5% with all four business units contributing. These results were led by strong growth in Home & Garden of 14%.
HHI, our hardware division, grew at 5%. Our pet unit grew at 4%, and our Home and Personal Care appliance business grew 1% organically. Adjusted EBITDA was flat with last year, right on our first-half plan. We do expect a solid second half with larger sales and larger EBITDA than the first half, primarily due to the seasonality of our Home & Garden business and a typically stronger back half of the year for our Hardware and Home Improvement segment. We expect improved sequential performance in our Home and Personal Care appliance business as we lap a very difficult first-half comparison and we see benefits from a new leadership team that we've installed in that business during this recent quarter. These changes include the appointment of a new President, David Albert.
Dave is a strong and seasoned business leader with both general management experience in several businesses and also regional experience. We also have appointed a new divisional CFO in the appliance unit with experience in both business unit and corporate financial strategy. We recently also completed the onboarding of a new VP of marketing who was hired from a well-respected consumer products company outside of Spectrum Brands. New leadership has been appointed in our clients unit to streamline both our operations and supply chain functions. This new team has already hit the ground running. It is directing its efforts towards stabilizing the business, focusing on our core, and planting the seeds for growth, which included stepped-up investments in this quarter in both new product development and increased marketing spend behind our Home and Personal Care brands.
Across our company, we are launching important new products in all of our business lines. We are stepping up marketing spend behind our brands. We remain on target to achieve our original 2019 adjusted EBITDA goal of $560 million-$580 million. If I could have you turn to slide seven now. I'd like to amplify my earlier comments about value creating and shareholder-friendly actions that were completed in the second quarter. Our rapid and major debt reduction has eliminated all non-revolver senior debt in our corporate capital structure. We've improved the duration and tenor of our liabilities. We have reduced materially the cost of borrowing. We have significantly lowered our pro forma annual cash interest expense. We ended the second quarter with a strong liquidity position of over $800 million.
Regarding stock buybacks, subsequent to our first quarter call, we opportunistically repurchased 4.6 million shares, or roughly 8.6% of our total share count. Going forward, we have up to an additional $750 million of capacity remaining on our three-year buyback plan. If we could turn to slide eight. As we accelerate the transformation of Spectrum Brands in 2019, we are on our way to building the faster, smarter, stronger Spectrum Brands of the future. We recently have embarked on a detailed global study to identify significant performance improvement and operating efficiency opportunities across our platform. Focus areas include the right resourcing of our commercial and our shared service structures, eliminating unneeded and duplicative work by improving and standardizing our processes. We are seeking efficiency gains in manufacturing, distribution, and our procurement functions.
We intend to deliver for our shareholders a fit-for-purpose organization for the new Spectrum Brands, and we are excited to provide more details on these activities and their expected results on our third quarter call. This work ties strongly to our Spectrum 2020 roadmap. It's a roadmap that I've discussed before in many settings, most recently at the CAGNY Conference. 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. We will accept nothing but outstanding quality and service while increasing innovation and marketing investments behind our new products. These actions are driving a culture of greater accountability, much quicker decision-making with an experienced and energized leadership team refreshed with new talent, focused on operational excellence as we position our company to be a low-cost provider delivering sustainable free cash flow.
With that, let me turn the call over to Doug.
Thanks, David, and good morning, everyone. Turning now to slide 10 and a review of Q2 results from continuing operations, beginning with net sales. Reported net sales increased 2.7%, and organic net sales grew a solid 4.9%, excluding unfavorable FX of $19.3 million. All four business units delivered organic growth, paced by a 14% improvement for Home & Garden. Reported gross profit was unchanged. Gross margin of 33.7% decreased 100 basis points, primarily due to input cost inflation and unfavorable product mix, partially offset by pricing. Reported SG&A expense of $235 million was unchanged from last year, coming in at 25.9% of sales this year, compared to 26.6% a year ago. Reported operating margin of 4.6% improved 100 basis points due to lower acquisition, integration, and restructuring charges.
On a reported basis, a slightly higher diluted loss per share of $1.06 versus $1 last year was attributable to one-time interest charges related to the early extinguishment of debt and foreign exchange losses associated with multi-currency divestiture loans, partially offset by lower restructuring and acquisition and integration expenses and a larger income tax benefit. Adjusted earnings per share of $0.26 decreased 46.9% due to higher operating expense driven by increased stock-based compensation and higher interest costs from assumed HRG debt. Turning to slide 11. Q2 reported interest expense from continuing operations of $94.2 million increased $26.5 million, driven by one-time interest charges from early extinguishment of debt, primarily the assumed HRG debt. Cash taxes of $14.5 million were comparable to last year.
Depreciation, amortization, and share-based compensation from continuing operations of $53.9 million increased from $27 million last year, primarily due to increased Share-based compensation and the impact of Home and Personal Care depreciation and amortization this year as a result of our moving the unit back into continuing operations. Cash payments for acquisition and integration and restructuring and related charges for Q2, including discontinued operations, were $14.6 million and $4.8 million respectively, versus $12.6 million and $25.1 million respectively last year. The reduced cash spend was driven primarily by improved operating efficiencies in the HHI Kansas Distribution Center. To business unit results, beginning with slide 12 and Hardware and Home Improvement. HHI's reported net sales growth was broad-based across its 3 product categories of residential security, plumbing, and builders hardware. Organic growth was 4.7%, excluding unfavorable FX of $2.3 million.
Strong load-in orders from new product introductions and effective promotions drove plumbing category growth, while increases primarily in the electronic lock segment fueled higher residential security sales. Adjusted EBITDA grew 15.8% to $52.7 million, with 160 basis points of margin expansion to 15.9% from higher volumes, productivity improvements, and expense controls. 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. To maintain smart lock innovation leadership, HHI is increasing investment in cloud technology, mobile apps, and access control. Highlighting its steady stream of innovation, new business in the back half of the year includes residential and commercial-grade levers, Wi-Fi Halo touchscreen smart locks, the Aura Bluetooth smart lock, and an enhanced Baldwin touchscreen.
HHI is also expanding consumer marketing awareness campaigns behind its unique patented Kwikset SmartKey security technology that allows consumers to re-key their door locks in seconds, leaving lost or unreturned keys obsolete. To Home and Personal Care, or HPC, which is slide 13. While reported net sales fell 4.1%, organic sales grew 1%, excluding unfavorable FX of $11.8 million. Lower personal care revenues, partly offset by higher appliance revenues, drove the reported sales decline. U.S. personal care sales fell double digits from haircare distribution losses not yet lapped from last year in the mass and food and drug channels. Lower European sales were primarily from the U.K. food and drug and e-commerce channel softness.
Small appliances revenue improvement was attributed primarily to U.S. mass channel growth in garment care and coffee makers, with partial offsets in Europe from foreign exchange, U.K. consumer softness related to Brexit, and reduced POS in the Latin America region. The decrease in adjusted EBITDA and margin was mainly attributable to lower gross margin from reduced personal care volumes, unfavorable mix, higher input-related costs, and increased marketing investments. HPC continues to expect second half comparisons to improve with Q4 EBITDA larger than Q3, consistent with historical seasonality. This includes new product introductions and expanding distribution in the U.S., Europe, and other regions in both HPC segments, coupled with financial recovery initiatives and organizational streamlining, business simplification, and rationalization with a heightened focus on the core.
As we have said before, in fiscal 2019, we are resetting HPC, rebalancing its cost structure, and investing more behind its brands to prepare for growth in 2020. Moving to Global Pet, which is slide 14. Building on solid Q1 top-line growth, Q2 reported net sales increased 1.8%, and excluding unfavorable FX of $5.2 million, organic sales grew a strong 4.2%. Double-digit improvement in U.S. companion animal revenues, primarily dog chews and treats, and pricing actions for raw materials and tariffs drove the increase, partially offset by lower U.S. aquatics and European dog and cat food sales. Adjusted EBITDA fell 8.1% to $32.8 million with a 160 basis point margin decline to 15.3% as a result of higher manufacturing and distribution costs. Pet expects solid performance in its large U.S. region to continue in the second half.
Important new product launches are occurring across Pet's larger brands, including Good Fun, DreamBone, SmartBones, FURminator, Nature's Miracle, Tetra, and GloFish, supported by higher investments in data-driven digital marketing aimed primarily at the rapidly growing e-commerce channel. Pet is also working 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 and Garden, which is slide 15. The 14.1% net sales increase was attributable to double-digit growth in our outdoor control category revenues. Distribution wins, strong early season home center orders, and generally more favorable weather this year than last drove category growth.
Adjusted EBITDA increased 17% to $29.6 million, and EBITDA margin expanded 50 basis points to 21.3% on the strength of improved manufacturing efficiencies from higher volumes and select pricing actions. Home and Garden remains optimistic about sales and adjusted EBITDA increases in 2019, given growth expectations in its seasonally much larger second half from distribution expansion in home centers and outdoor insecticides, lawn and weed killer, and innovation success with Hot Shot ant, roach, and spider, all supported by higher advertising spend, off-shelf promotion, and other promotional programs. New feature space and end cap placements in both mass and the DIY channels are also in place, along with continuous improvement savings, improved manufacturing efficiencies, and better mix. Moving now to the balance sheet in slide 16. We completed Q2 in a solid liquidity position, including $652 million available on our $800 million cash flow revolver and a cash balance of $176 million.
Debt outstanding was $2.4 billion, down 50% from $4.8 billion at the end of fiscal 2018. 4.6 million shares were repurchased in Q2 for $250 million or $54.22 per share. There's approximately $750 million remaining on our three-year repurchase authorization. Capital expenditures were $13.6 million versus $17.8 million last year. Turning to slide 17 and our 2019 guidance. We continue to expect reported net sales growth from continuing operations in 2019, driven by innovation, increased marketing investments, pricing actions, and market share gains. We now expect FX to have a negative impact on sales of approximately 130 basis points based on current rates. We reaffirm our adjusted EBITDA guidance from continuing operations to be between $560 and $580 million. Consistent with seasonality in prior years, Q3 EBITDA is expected to be higher than Q4.
Depreciation and amortization is expected to be between $230 and $240 million, including stock-based compensation of approximately $57 million, with roughly $17 million in each of Q3 and Q4. For adjusted EPS, the $29 million depreciation and amortization catch-up in Q1 when we put HBC back into continuing operations is excluded, therefore, this range is $29 million at the midpoint. Fiscal 2018 stock-based compensation for reference was $12 million. We are increasing restructuring and restructuring-related cash spending to be between $40 and $50 million with the increased funding, the performance improvement, and cost reduction opportunities David discussed earlier. Capital expenditures are expected to be between $70 and $75 million. We have $1.3 billion of usable federal NOLs remaining post the asset sales. Finally, as a reminder, for adjusted EPS, we use a tax rate of 25%, including state taxes. Thank you.
Dave, now back to you for questions.
Thank you, David and Doug. Operator, with that, you may now begin the Q&A session, please.
At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Again, that's star one to ask a question. 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're starting off a lower base on a year-over-year basis. Can you just talk through the different puts and takes there to start? Thank you.
I'll let Doug take that first one.
Sure. Hi, good morning, Olivia. Yeah. The free cash flow, we're 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 sale. 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 in the little bit of cash we have on the balance sheet at this point.
I gave you outside of that the elements that you can use for your modeling. 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. That's CapEx, that's depreciation as adjusted for the debt paydown. That is our restructuring cash. Cash taxes, we still expect to be between $40 million and $50 million on an annual basis going forward. Hopefully that's helpful. If not, please reach out to Dave or Kevin and they can continue to help.
Look, the only thing else I would add is we did pay off over 50% of the debt of the company. We do generate a lot of free cash in the back half of our year, so we're starting to collect the cash now. Our liquidity position will build as we finish out this year. 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 there's $130 million, $150 million 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. Just on sales, clearly quite a bit better than we expected across the divisions, pretty broad-based. Can you just go over any timing shifts that we should be aware of, how you view your in-store inventory levels at this point? 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? Thanks.
Yeah, look, hopefully you're getting a consistent story. I took this position just over a year ago, 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. That means we want to eliminate what I view as non-strategic spending, we want to increase strategic spending. What I'm 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 overpromise anything for 2019. 2019, as you remember, I billed it as a year of returning the company to stability and planting the seeds for growth in 2020.
Clearly, we are planting those seeds and, look, I would tell you on the bottom line, we could be reporting much better numbers, 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. You saw some improvement and we're 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 on the next call on the progress they're making. They are highly focused on not just revenue, but profitable revenue. I wouldn't expect any surprises going forward coming out of there between now and then. From a Home & Garden perspective, I would say that this year, 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.
Relative to last year and to your timing question, I would say for Home & Garden, a little better seasonality.
Great. Thanks so much. Appreciate it.
Thank you.
Your next question comes from the line of Bob Labovitz with CJS Securities.
Good morning. Congratulations on some nice growth.
Good morning to you, Bob. How are you?
Yeah, let's keep it up. I wanted to talk a little bit about that and then shift to online strategy as well, maybe merge the two. Can you talk about how you view each of the segments in terms of over a medium or longer term organic growth potential? What are the key drivers you're pushing? You mentioned in the prepared remarks a focus on e-commerce, particularly in pet. Maybe talk a little bit about the online strategy as you shift there for growth as well.
Yeah, 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 really 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? I think we've done a pretty good job there. I don't think we've done a really good job of getting a return on digital spend. Right now we're in the midst of optimizing that digital spend, but we're doing it with people that actually speak the language of the Amazons of the world and our other e-com partners. We're partnering with them, and quite frankly, we're getting better returns on the capital we allocate there.
I think part of my new role is we spent kind of 10 years, I was doing a lot of external capital allocation. Right now we want to get internal capital allocation to a much higher rate of return, and we're doing that on the digital side. Clearly, on your first question, appliances continues to migrate online at a pretty rapid rate. We're definitely seeing a meaningful increase in e-com on our pet business as well. Home & Garden is small, but the growth rates are strong. HHI, that's a smaller component. Anytime you get big liquid in a bottle, like on our Home & Garden side, or you've got heavy products like hardware and locks, you're typically doing less online. 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.
I see just a very low penetration rate there, but massive white space, and I see very strong end market growth. We see adoption rate low at the moment, but the growth rate is exponential. I think you've heard Doug talk about it. I was recently in Lake Forest with our HHI team, and we're revamping some of the merchandising we put out. We want to do not only a better job explaining our SmartKey technology to our customer, but also trying to bring clarity at point of sale and 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.
Quite frankly, we think that'll grow, whether we're in expansionary times, recessionary times, given the tailwind there and the adoption rate, we really want to maintain our leadership position. You'll see a lot more of that, and you'll probably see a lot of news releases this summer on new products that we're coming out with to further that activity.
Okay, great. Thank you for the color. Just one other quick one. You mentioned, obviously, a whole new team or mostly a new team at the HPC executive level. Could you talk about the priorities you've given to them? 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 with too many people with too many SKUs. Look, we're very, very good at procuring product. We are a low-cost provider. We marry that with some innovation, and we have great brands. We've really just got to get back to our core. We've got to get the right product to the right customers at the right prices, and that's what we've done for a decade, and I think we kind of lost focus. It's restoring that focus. Listen, there's some complexity in that business that we're going to drive out. There's more efficient ways to do things, we're doing that.
Listen, there's no question on the profitability line this quarter, we probably could have doubled it, for reporting purposes, but we would've 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. There's no better time to plant seeds for growth than the current moment. It's just those sometimes are expensive seeds. They have a mandate to continue to invest behind innovation. You've got to bring new products that answer consumers' needs and convenience. You've also got to let people know about why those things help them have better experiences in the kitchen or on a beauty side.
You've got to let them know that through smart advertising. Those are different mandates. That was 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 streamline supply chain and operating expenses so that we can reinvest in more strategic activity. I would tell you that's kind of the main new vision, clarity, and focus being brought to that business unit.
Super. Thanks very much.
Thank you.
Your next question comes from the line of Faiza Alwy with Deutsche Bank.
Yes. Hi, good morning.
Good morning.
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. I just wanted your updated take on how you're thinking about the market.
Yeah, I think you're right. Look, we definitely saw a pretty rapid and steep deceleration in demand. I would tell you, I think it was November 18 was when I first personally noticed it, and it was very sluggish through December. That had me quite concerned as a real headwind. Clearly I think the pivot by the Fed, lower rates from the market and then the 10-year trading at 2.5% and pushing lower now given macro events is lowering mortgage rates. The housing market has just become accustomed to very low rates. 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. We remain the dominant player in the remodel space.
Again, I think right now what would be great, and what we see with the builders is there's actually still a lot of pent-up demand, and you see the millennials wanting to get into housing. It's an affordability and it's a supply issue. Quite frankly, a lot of our builder partners are now looking to how do we create more product in that $200,000-$500,000 zip code. 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. Look, again, we don't want to get over our skis. We have a tough comp in Q3 for the HHI unit. We're 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. I'm feeling a lot better about the outlook for HHI as I talk to you today than I did three months ago.
Okay, great. Just a follow-up on HHI EBITDA. I know it accelerated relative to last year, last year was a very easy comp from a margin perspective. If I look at it on a two-year basis, it's still decelerated. Could you talk about some of the puts and takes? Is it a mix issue? Is it cost inflation? Is it more investments? Just a little bit more color around the EBITDA if I compare it to two years ago.
I'm going to pass this one to Doug, if that's okay.
It's primarily related to input cost inflation, 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 cost side in the short run. 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.
Okay, great. Thank you.
Your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt.
Good morning. Thanks for taking my question.
Hi, Jim.
Morning, Jim.
Hey, guys. On the investment spend, first, can you give us a little bit of color on how much it was weighted to first half versus second half of this year? Was it more weighted to first half, and should we see less impact on EBITDA margins in the back half?
It varies by division. 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. That would be a situation where you're actually going to see marketing increase. Again, 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, our 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?
I think that's right. I think later in the year, appliances will ramp up a little bit as we head into the holiday quarter, which is our first quarter next year. Some of that spend will be committed and happen ahead of time. On the HHI business, they're 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. You talked about the detailed study for improvement and 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?
Look, I'm actually very excited about this. I want to wait and get some more tangible evidence in our hands before we 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. 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. Again, I want to balance it. I think we will drop 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, new product development. 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.
Great. Thanks, and best of luck in the second half.
Thanks, Jim.
Thank you so much.
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, though, as 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?
Yeah. I don't have specifics to provide to you, Sam, because they vary across the businesses. Our vitality rate in general is over a three-year period is 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 you. No, that's super helpful. If I could sneak one in on HHI here. You guys mentioned in the prepared remarks relatively low household penetration rates across deadbolts 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 three to five years?
Penetration in the U.S. is sub 10% on the smart lock category.
Yeah, use between 5% and 10%. That's as narrow as we'll go.
Our overall electronics business, which would include touchpad and other non-smart, non-connected, so it's both connected and non-connected, that is also a little under 10%, around 10% of our total business.
You have a whole generation of customers that is used to just living on their phones, 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, and to let somebody deliver something or to let a relative in. It's just the future, we want to be up front.
Absolutely. No, thanks so much, guys. That's really helpful color.
Thank you.
Your next question comes from the line of Joseph Altobello with Raymond James.
Thanks. Hey, guys. Good morning. I did have a few questions around the investments you guys are making this year, and you talked about that for the last couple of quarters, including this morning. If I look at selling expense, for example, and R&D expense, both are flat year-to-date. It seems like all of that investment is going toward 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 areas and the piece that you don't see, which is reprioritization of gross to net spend. We're focused on all of those revenue-driving spend activities. I will tell you in the second quarter that we just came off of, 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 were as planned. The other two businesses as planned too. We're about flat year-over-year, and we'll see a step up in investment as we go throughout the year. 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.
You'll hear more of this theme as we get into Q3, and we talk to you about some additional shareholder enhancement, vitality initiatives that we're undertaking. Again, I think you could parallel it to some of my earlier comments about getting a very detailed dashboard of non-productive spend. There's a lot of dollars that are being recycled inside of these units. To Doug's point, we could have probably reported twice the profitability of the appliance unit this quarter if we hadn't stuck with our discipline to invest in innovation and marketing in the face of a challenged quarter profitability-wise, particularly in that unit. We are sticking with the discipline.
For the full year, is the step up $20-$30 million, would you call it this year?
That's not unreasonable. The high end of that, Joe, is not an unreasonable area.
That's recurring, right? That doesn't come.
Yeah. That'll go on forever. That'll 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. 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've 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 this year. Could we see more stock repurchases, or are you done for this year? How are you thinking 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 shares. 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 deleveraging. I am committed to delivering a stable Spectrum Brands this year that has vision, clarity, focus, and ends 2019 as the faster, smarter, stronger Spectrum Brands of the future. I've talked about wanting to get to just more consistency, just real rhythm and cadence in the underlying operations, and we're making progress. If you just look at every metric from three quarters ago, two quarters ago, 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.
Look, I'll tell you, we are starting to look at tuck-ins again. I don't see anything big on the horizon. If we can do tuck-in acquisitions that are very accretive, that fit with our existing business units and are highly accretive and synergistic, we'll look at that. It's going to have to be 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.
Understood. Thanks, guys.
Thanks, Joe.
Your next question comes from the line of Carey Martinson with Jefferies.
Good morning, guys. On yesterday's Energizer call, they talked about the Varta disposition 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?
We sold the entire battery division for $2 billion. We have reserved $200 million should it be needed, and we'll wait to see when they complete the sale. No, we've booked and we've disclosed a $200 million possible true-up, and that's a cap at $200 million. Hopefully they do better, but we'll have to wait to see how they progress that M&A discussion and who's the buyer and at what price.
Okay. With the material debt pay down here, how should we think about pro forma interest on a go-forward annualized basis?
We'll be filing the Q at the end of the day today. You'll see the debt table in there. It's very straightforward now. You'll be able to calculate it on an annualized basis.
Okay. Just lastly, there's been some talk for others seeing some gains in the home and garden space for Roundup equivalents. I was wondering if that was any sort of a lift for you guys in the lawn and garden space.
We have expanded distribution there. It is 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 given litigation against Monsanto and glyphosate. Spectracide is an amazing product. It is a great product. We want to tell more people about its benefits and the fact that we think that it is a superior product offering at a great value price point, and we want to continue to get that message out there. That is why we are stepping up our investment marketing.
Thank you very much, guys. Appreciate it.
Operator. It looks like we have one more questioner, so let us take that, and then I think we will close down the call.
Your final question comes from the line of Carla Casella with J.P. Morgan.
Hi, I wondered if you could give us an update on any expected impact of tariffs if changes are made.
Yeah, we would prefer both sides reach a consensus. I think that'd be in the best interest of the globe and ourselves. I think that depending on how things progress this weekend. Look, we went through this fire drill last fall. We were prepared to pass the increase on January 1. 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. I think the biggest problem for us would be demand elasticity. Yes, from a mechanical standpoint, we receive Chinese product, and we would have to write the check to United States Treasury. We're going to have to pass that on. Ultimately, the consumer's going to pay for it. We have to go through the fund that we don't enjoy doing with our retailers.
If we end up in a tariff situation, we'll pass it on, and we'll see where the final demand is. I don't think we're alone in this. Thank God the majority of our businesses are vertically integrated on this side of the globe.
Okay, great. Then you mentioned the personal care appliance had 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. We'll continue to lap it as the year unfolds, but comps should begin getting better in the U.S.
Okay. Then just on the, now that you've completed the divestitures and brought your leverage down and you expect to get to 3.5 times, is that a good long-term go forward level? With that and all of your kind of cost savings and business investment initiatives, are you starting to look at maybe adding to the portfolio with another leg of the stool?
Yeah, 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. It's got a high hurdle to get in here. I think we want to deliver what we promised this year. We want to keep the balance sheet down. I think as we get into some greater detail, and we can talk to you, we're 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 obviously free cash flow improves, and we'll generate a lot of free cash over the remaining life of that buyback program, and we'd like to take advantage of it. We're looking at a lot of things, and we'll continue to be opportunistic. That's the best way I can.
The leverage you think is the 3.5 go forward, or would you be willing to take that up, or does that need to come down more?
We like 3.5 given what happened last year, and that's where I'd like to see us run on a long-term basis.
Great. Thank you.
Okay, operator. Well, thanks to David and Doug. We have exhausted our questions and nearly reached the top of the hour. We'll 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.
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