Energizer Holdings (ENR) Q2 2019 Earnings Call Transcript

ENR earnings call for the period ending March 31, 2019.

Motley Fool Transcribing
Motley Fool Transcribing
May 8, 2019 at 7:23AM
Consumer Goods
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Energizer Holdings (NYSE:ENR)
Q2 2019 Earnings Call
May. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Stephen, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's second-quarter fiscal year 2019 conference call. [Operator instructions] As a reminder, this call is being recorded.

I would now like to turn the conference over to Jackie Burwitz, vice president, investor relations. You may begin your conference.

Jackie Burwitz -- Vice President, Investor Relations

Good morning, and thank you for joining us. With me this morning are Alan Hoskins, chief executive Officer; Mark LaVigne, chief operating officer; and Tim Gorman, chief financial officer. This call is being recorded and will be available for replay via the investor relations section of our website, energizerholdings.com.  Also available on our website is a slide presentation providing additional details for the second-quarter results, the updated outlook for fiscal 2019 and the initial outlook for fiscal '2020.

During today's call, Alan will share his perspective regarding the opportunity going forward now that we have completed the battery and auto care acquisition, in addition to touching briefly on the financial highlights for the quarter. Mark will then provide insight into the integration work we've -- under way along with synergy targets and costs to achieve. And finally, Tim will review the results for the second quarter and provide an update to our fiscal 2019 outlook and a preliminary outlook for fiscal '2020. During the call, we may make statements about our expectations for future plans and financial and operating performance.

Any such statements are forward-looking statements which reflect our current views with respect to future events. We also refer to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in the press release issued earlier today, which is available on our website. Information concerning our category and market share discussed on this call relates to markets where we compete and are based on estimates using Energizer's internal data, data from industry analysis and adjustments that we believe to be reasonable.

Comments referencing the Varta business relates to the Varta consumer battery, chargers, portable power and portable lighting business in the Europe, Middle East and Africa regions and comments referencing the Varta brand do not include these markets. References to specific quarters and years pertain to our fiscal years and references to the legacy and/or base business related to the Energizer business prior to the completion of the battery and auto care acquisition. Investors should review the risk factors in our Form 10-K, 10-Q and other SEC filings for a description of the key factors affecting our business. These risks may cause actual results to differ materially from our forward-looking statements.

We do not undertake to update these forward-looking statements.  With that, I would like to turn the call over to Alan Hoskins.

Alan Hoskins -- Chief Executive Officer

Thanks, Jackie, and good morning, everyone. Over the last year, we have taken bold steps to transform our company. Today, we will discuss our combined results and outlook as a diversified global household products leader. The completion of the acquisitions of the Spectrum Battery and Auto Care businesses establishes us as the global leader across each of the attractive categories in which we compete.

Energizer has added new brands to our already strong base platform, enhancing our ability to deliver growth and profitability across categories we know well. Before I touch on our results for the quarter, I want to spend a few minutes detailing the opportunity we have created for our customers, consumers and shareholders by bringing these businesses together. First, we remain committed to our primary objective to maximize free cash flow. We are confident that we can drive adjusted EBITDA growth in the range of 650 to $675 million, generating adjusted free cash flow in the range of 330 to $370 million in 2020.

By adding top brands in categories where we already have tremendous expertise, we have increased our sales by nearly 50%. We are expanding our portfolio of brands and enhancing our ability to work with customers to meet the needs of even more consumers around the world. As a result of this strengthened position, we expect to deliver growth rates in excess of our categories going forward. Increased scale from a top line perspective, combined with the opportunity to deliver synergies across both acquired businesses, will also enable us to drive improved margins across the businesses.

We expect adjusted EBITDA margins to expand from the current year levels of approximately 21% up to 24% by 2020. In batteries, we have added the No. 3 brand in many of our strategic markets, as well as expanding the number of manufacturing facilities, making us the market leader in the category. As most of you know, over the past five years, we have created significant value by optimizing our legacy facilities.

By expanding our manufacturing footprint, we are enhancing our ability to replicate that success at even greater scale. On the auto care side, we will also be the market leader in the category with the No. 1 or No. 2 brands in three or four segments.

The addition of the iconic brands Armor All, STP and A/C Pro establishes our platform as the clear leader in the category, and combined with our legacy auto brands, gives us terrific portfolio of brands to meet all consumer car care needs. Similar to the batteries side, we have also expanded our manufacturing footprint with the acquisition of a new dedicated manufacturing facility in Dayton, Ohio. This facility was specifically built for auto care manufacturing and will provide us with the flexibility and scale to serve the needs of our customers in a highly efficient manner.  The bottom line is that the acquired businesses are in categories we know well and would dramatically enhance our ability to leverage our existing capabilities and proven operating expertise to drive profitable growth and enhanced margins across our expanded platform.

Turning to capital allocation. I'd like to briefly remind everyone of our strategy as we move forward. Our combined businesses will generate significantly more free cash flow and we do not expect this to drive significant changes in our financial policies. We will continue to pay our dividend at current levels with a priority for excess cash flow to be used to delever from our current debt levels.

Over the next three years, we will look to return to leverage levels in line with our historical level of approximately three times net debt to adjusted EBITDA. We believe a strong balance sheet provides Energizer with the appropriate base from which we can prudently manage our business. Before I turn the call over to Mark to provide some details on our progress and plans for integrating these businesses, I'd like to say a few words about our second-quarter results Organic revenues were up 1.9% for the quarter, building on the consistent record of growth we have delivered since separation. These results were driven by pricing and distribution gains across many markets and reflect the team's focus on operating with excellence, as well as the benefits of our continued investment in innovation and brand-building activities to ensure our brands remain strong over the long-term.

These investments ensure our legacy battery business remains strong and performs well. In addition, we announced price increases on Energizer Max and Energizer lithium product offerings in the U.S. and in several international markets, all of which we expect to go into effect over the balance of this fiscal year. During the quarter, we also launched a powerful new look for the global Energizer brand.

Our iconic brand characters, the Energizer Bunny and Mr. Energizer, take center stage in the brand's new digital identity and will showcase their larger-than-life personalities across packaging and store displays and advertising. The new packaging is shipping to U.S. retail stores now and will begin shipping to international markets over the balance of this year.

This provides just one of the many innovations we've introduced across our portfolio this quarter. Turning to the acquired businesses. Performance in the battery business was challenged with value share decline since we first announced the acquisition in January 2018. We attribute a portion of these results to the disruption from the acquisition process, which took a year to complete.

During that period, we do not have the ability to directly influence any commercial activity, including those items which were ultimately activated during the quarter.  On the positive side, our legacy Energizer business has been the beneficiary of a portion of Rayovac's distribution losses during last year, including the second quarter. While these results are not reflective of what the businesses are capable of delivering, we know how to address these issues and return them to their full potential as we have demonstrated in our legacy business since separation. Our commercial teams are already working jointly to leverage our multibrand strategy with key customers.

Our U.S. retail customers' response to our strategy and growth plans had been positive, and we remain extremely confident in the overall category and our ability to deliver value with our expanded portfolio. In auto care. Top line in the acquired business was down as we strategically chose to exit unprofitable private label business, which negatively impacted revenues, but was the right decision in terms of improving long-term profitability.

In addition, there was a slow start to the season due to cold and wet weather. The third quarter represents the peak season in approximately 35% of full year auto care sales and we expect a rebound in sales as weather conditions improve in the third quarter. Our primary focus since closing the acquisition has been on ensuring that the Dayton facility is well positioned to operate with excellence throughout the peak season and our team has made significant progress driving operational improvements, as was clearly visible during our recent visit to the facility. Looking at the full year.

We are providing our first adjusted earnings per share outlook inclusive of acquisitions, which is expected to be in the range of $2.90 to $3. This updated guidance reflects the continued strength in our legacy business, offset primarily by the dilution related to our new capital structure and deal-related amortization. In order to better illustrate our view of the combined businesses for a full year, we have also provided our initial outlook for 2020 with adjusted earnings per share expected to be in the range of $3.25 to $3.45. Tim will provide more detail on both the second-quarter results and our outlooks for 2019 and 2020.

Now I'd like to turn the call over to Mark for an update on the integration planning and execution, synergy opportunities and the divestiture of the Varta business.

Mark LaVigne -- Chief Operating Officer

Thank you, Alan, and good morning, everyone. I want to echo Alan's comments about how excited we are to be moving forward with our expanded platform. While a lot of work lies ahead as we stabilize and integrate these businesses, we are going to follow the same proven strategic playbook that has driven our success over the past several years, leading with innovation, operating with excellence and driving productivity.  Now that we have closed both acquisitions, we are focused on avoiding any disruption to our customers and continuing to operate with excellence.

We are validating our insights into the opportunities to deliver value and we are planning and executing the integration in a disciplined manner. During the quarter, we made significant progress across our commercial teams and conducted joint customer meetings in both the battery and auto care businesses. This approach allows us to illustrate the power of these combined businesses, portfolios and teams directly to our customers.  In the battery business, we have already begun to capitalize on our expanded capacity to provide flexibility to meet our customers' needs while driving operational efficiencies in both our legacy and new manufacturing and distribution facilities.

At the same time, we have focused our attention on improving the operating performance of the auto care facility in Dayton. In the short period of time that we have owned the business, we have an enhanced line efficiency, eliminated waste, improved sourcing of raw materials, reduced overflow capacity and managed the workforce more efficiently. The efforts by our teams are paying off with steadily improved order accuracy and consistently maintaining fill rates in the high 90s as demand increases moving toward the peak season. These improvements contributed to increased gross margins for the quarter and we see significant opportunity to drive long-term efficiencies in Dayton.

We will emphasize operating with excellence throughout the upcoming peak season and ensure we exceed our customers' expectations. We are extremely pleased with the progress that we have seen at the facility, the energy of our employees and the opportunities that lie ahead.  Longer term, our new battery and auto care portfolios will bring tremendous value to our customers and consumers. With our broader platform in batteries, we see significant upside in leveraging our value brand in conjunction with our premium Energizer brand as part of our multibrand strategy across our global markets.

In auto care, we see the ability to further invest in the iconic Armor All, STP and A/C Pro brands. Our marketing teams are crafting global brand strategies to leverage the strength of all of our brands. We will bring Rayovac, Varta, Armor All, STP and A/C Pro to life with the same discipline and effectiveness you have come to expect from Energizer. This new expanded portfolio of brands and products puts us in a clear leadership position in the battery and auto care categories.

And finally, we continue to expect to achieve 70 to $80 million in annual run rate synergies across the businesses with approximately 10% realized in the first full year of ownership with the balance split evenly between years 2020 and 2021. We expect to incur onetime cash costs of approximately 1.5 times the expected benefit. Synergies will be realized in six main areas where we have significant experience driving improvement, including facility consolidation, operational indirect cost reductions, material cost savings, working capital optimization, sourcing and procurement efficiencies and SG&A reductions. We are finalizing the analysis to determine the most effective and efficient way to achieve these goals and are extremely confident they will enhance our responsiveness and effectiveness, all while being more efficient.

Beyond the cost synergies, we also expect to drive revenue growth as we leverage our strong commercial relationships to drive holistic conversations with customers across the full breadth of our portfolios.  We expect to see incremental opportunities contribute to our top line starting in 2020 as these conversations are now under way with activation next year. Before I turn it over to Tim, I would like to touch on the divestiture process for the Varta business. Significant progress has been made carving out this business in preparation for the divestiture.

However, the process has been challenging given the time limitation and regulatory nature of the process. As a result, we expect the final purchase price will be below our original estimate. We remain on track to have a transaction signed within the next month, with an anticipated closing in early July. We will provide an update on proceeds after we have a final agreement.

Looking ahead, we have all the pieces in place to execute seamless integrations and to drive improved performance with attractive growth opportunities across our expanded portfolio of leading brands. With that, I will turn it over to Tim.

Tim Gorman -- Chief Financial Officer

Thanks, Mark. Now let's walk through the results for the second quarter of 2019 in more detail. And then I will provide our full year 2019 outlook, inclusive of acquisitions. And finally, the preliminary view of 2020.

I will cover the highlights in my prepared remarks, but we have also posted slides on our website to provide greater detail on the second-quarter results and our outlooks. Details on our second-quarter results are included on Slides 4 through 8.  Looking at the second-quarter results. Adjusted EBITDA was $101 million in the second quarter and $262 million in the first half of 2019.

This includes results for the acquired businesses only under our ownership. Net sales on a reported basis were $556 million, up $182 million inclusive of the contribution from the acquired businesses. Organic net sales increased 1.9%. The increase in organic sales was driven by improved pricing distribution gains despite lapping lithium fill volume in the prior-year second quarter.

 Foreign currency headwinds offset the increase in organic sales and were a 290-basis point headwind in the second quarter. In addition to that, negative impacts from the highly inflationary economy in Argentina reduced net sales by 20 basis points. The acquired auto care and battery businesses contributed net sales of $85 million and $100 million, respectively, during the quarter. Based on the closing dates, the auto care business includes two months of sales in the quarter and the battery business includes a full quarter.

Looking at gross margins. Our adjusted rate declined 440 basis points to 40.6%, driven by the acquired businesses having a lower-margin rate profile. The legacy business was essentially flat compared to the same quarter a year ago. Exiting the unprofitable private label business in auto care, combined with improved operating efficiencies, resulted in more than a 5% improvement in the gross margin rate in the acquired auto care business for the two months we owned it.

We exited the quarter with $3.6 billion in gross debt and cash on hand of $333 million, or net debt of $3.2 billion. We repaid $50 million of term loan during the second quarter.  And finally, adjusted earnings per share from continuing operations was $0.20 compared to $0.45 in the prior-year second quarter. The decline in adjusted earnings per share was entirely deal-related due to purchase accounting, increased equity, preferred dividends and increased interest.

Excluding the impact of increased equity, the legacy business was flat compared to the prior year as we overcame currency headwinds in the quarter. Both acquired businesses provided positive adjusted EBIT contributions in the quarter even with the increased deal-related depreciation and amortization discussed above. Slide six provides the details of these impacts. Just as a reminder, all remaining details for the second quarter are included in the slides posted on our website.

Now I would like to turn to our outlook for the combined businesses for 2019. We will be focused on stabilizing the acquired businesses and executing our integration plans, which will lay the foundation for delivering shareholder value in the years to come. Our plans will set us up to realize significant earnings and free cash flow growth over the next several years through top line growth, improved margins, reduced SG&A and reduced interest expense. When all is said and done, these acquisitions provide a very positive free cash flow story.

 Slides 10 through 13 provide the detailed guidance for 2019. I will start with the key areas to highlight. Including only partial year results for the acquired businesses, adjusted EBITDA is expected to be in the range of 540 to $560 million and represents an EBITDA margin of approximately 21.5%. This would represent 35% to 40% increase over legacy adjusted EBITDA levels.

And adjusted free cash flow is expected to be in the range of 220 to $250 million. Net sales on a reported basis is expected to be in the range of 2.52 to $2.57 billion with organic net sales growth in the range of three to three and a half percent, driven by distribution gains and the benefits of pricing. The battery acquisition is expected to contribute net sales in the range of 350 to $370 million for the nine months included in 2019. And the auto care acquisition is expected to contribute net sales in the range of 350 to $360 million for the eight months included 2019.

Gross margin rate, excluding unusuals, is expected to be approximately 42%, driven by the lower-margin profiles of the acquired businesses. Recall the pro forma combined financial statements for 2018 provided earlier this calendar year reflected a combined gross margin rate of 41.6%. Our outlook for 2019 reflects the expected improved gross margin rates in the acquired auto care business and improved pricing. Gross margin rate on the legacy business is expected to decline by 70 basis points, primarily due to the negative impacts of foreign currency experienced in the first half of the year.

We expect the benefits of our price increases to build over the balance of the year, but they will be offset by certain onetime product costs incurred in the second quarter.  As Alan mentioned, our 2019 adjusted earnings per share outlook is $2.90 to $3 for the combined businesses. This assumed that all preferred shares are converted to common, resulted in estimated weighted average diluted shares of 72.5 million shares. We expect to use the proceeds from the Varta divestiture to pay down term loan debt.

This would result in our net debt being in the range of 2.9 to $3 billion and our leverage ratio to be roughly 4.7 times by the end of 2019. To help guide you through the impact of preferred shares on dilution going forward, Slide 13 outlook -- outlines the share count showing the preferred shares on a fully converted basis and on a not converted basis for subsequent quarters. Given 2019 represents only a partial year of results for the acquired businesses, we are providing a preview of our expectations for 2020 with a view into the full year run rate for the combined businesses. We do not expect to provide a preview in future years as we will revert back to the normal practice of providing our annual outlook in November.

The key takeaway from the outlook for 2020 is that our adjusted EBITDA is expected to increase by about 20% to an EBITDA margin of 23 to 24%. In addition, adjusted free cash flow is expected to increase approximately 50% from 2019 levels. 2020 will be the first year our leadership team will be able to fully impact the operating plans for each combined basis, including total battery and auto care. We expect to grow ahead of the category in both battery and auto care by investing in new product development, brand support, retailer development and pursuing opportunities for distribution gains in both categories.

We also expect meaningful growth in our international auto care business with the goal of doubling that business over the next three to four years. This would represent a top line opportunity of roughly $50 million and an upside of $20 million in gross margin.  2020 will have a modest benefit from this opportunity, if any, as our focus will be on integration, realization of synergies and restoring growth in the acquired businesses in existing markets. Now turning to our 2020 preview, which is included on Slides 15 through 18.

We expect net sales on a reported basis to be in the range of 2.79 to $2.85 billion, including 2.24 to $2.28 billion from our combined battery business and 555 to $575 million from our combined auto care business. Organic net sales are expected to grow low single digits, with the battery business growing organically by one to 2% and the auto care growing by 2%. The increase in organic net sales is expected to be driven by both improved pricing and distribution gains. Gross margin rate, excluding unusuals, is expected to improve and be in the range of 42 to 43%, reflecting the realization of synergy benefits and improved operating efficiencies during 2020.

Adjusted earnings per share is expected to be in the range of $3.25 to $3.45. This assumes all preferred shares are converted to common, resulted in total, weighted average diluted shares of 75.5 million shares. Adjusted EBITDA is expected to be in the range of 650 to $675 million, up 20% from expected 2019 levels. This represents the margin rates of 23 to 24%.

And most importantly, we expect to generate adjusted free cash flow in the range of 330 to $370 million, up 50%. Finally, our strategic priorities are centered around maximizing free cash flow, allowing us to invest in our business and delever. We are targeting net debt in the range of 2.7 to $2.8 billion. By the end of 2020, we are targeting a net debt-to-EBITDA ratio of approximately four times.

The outlook we have provided for 2020 is just the beginning of the opportunities we believe are available to us with these transformational acquisitions. We expect to see an acceleration of earnings and free cash flow beyond 2020 as we realize our full synergy benefits and operating efficiencies while also executing our plan to delever from our current debt levels. Our team is excited by the opportunities that lie ahead and confident in our ability to achieve them.  Now I would like to turn the call back over to Alan for closing remarks.

Alan Hoskins -- Chief Executive Officer

Thanks, Tim. I want to summarize the key takeaways from our outlook for 2019 and 2020.  Our strategic priorities are focused on maximizing free cash flow, allowing us to invest in our business and delever. This is the key component of creating value for our shareholders.

 Our legacy business remains strong as our teams continue to lead with innovation, operate with excellence and drive productivity resulting in consistent sales and earnings growth. We will continue to drive further organic growth in our legacy business with the recently announced price increase in the U.S. and the rollout of our Energizer brand refresh.  The combined commercial and marketing teams are now fully engaged with their acquired battery and auto care businesses and we expect the top line trends to move in a positive direction.

Our teams are well on their way to finalizing full integration plans and they have begun implementation. We remain extremely confident in achieving the full synergy benefits in the next three full years.  Before we open it up to questions, as we have shared with you today, the benefits of our transformational acquisition will go well beyond 2020 as we continue to realize synergies, improve operating efficiencies, expand distribution and pay down debt. Operator, we're now ready to open the line for questions.


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Questions & Answers:


Operator

[Operator instructions] And our first question comes from Bill Chappell with SunTrust. Please go ahead.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Thanks, good morning. Just on the battery pricing in the U.S., you talked about Max, announcing a price increase or putting through a price increase that will be reflected in the coming months. Wanted to kind of better understand, are you seeing competition match that price or lead that price increase? And then what are you doing on the Rayovac side? Are you also matching that price? Or are you expanding the price gaps?

Alan Hoskins -- Chief Executive Officer

Yes. So a little bit of background, Bill. It's Alan. I'll start with the current quarter.

We did take pricing and saw the benefit of that in 10 markets, including the U.S. We had taken pricing on our rechargeable and specialty lines at that point. The recent announcement in the U.S. was the price increase on the Energizer Max and Ultimate Lithium and that will positively impact our results in the second half of the year.

You'll see the full annualized benefit of that in fiscal year 2020. We do look across all of our lines. At this point, we're moving forward on Energizer Max and Energizer Ultimate Lithium. We will, down the road, consider pricing opportunities across the portfolio.

At this point, those are the brands and the segments that we'll be taking pricing on. In terms of competitive activity, I really can't speak to that. But what I can tell you is that as we look at overall pricing and mix in the battery category are improving. We're seeing promotions stable, which is consistent with what we've seen in prior quarters and prior years.

On an average, unit pricing is actually up 1%. The way you'd want to think about pricing is, currently, the price gap between the premium brands and the private label and price alkaline brands has narrowed because of pricing that occurred on those tertiary brands. We would expect with our announced price increase, that, that gap will increase. But as we've seen historically, that normalizes over time.

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

OK. And I guess as a follow-up. Can you maybe give us more color on how, at least in North America, how the Energizer and Rayovac brands will interact? I'm just trying to understand, we sit constantly or continue to see at least in tracked channels the Rayovac brands struggle. And obviously, that's been more than picked up by the Energizer brand and other brands.

And so, as we move through this year, and I understand you have a lot of plans for next year, but will that -- for Rayovac that start to subside? Will you see the bigger distribution gains for Energizer? I'm just trying to understand how we should be looking at the data over the next kind of six to nine months.

Alan Hoskins -- Chief Executive Officer

Yes. So generally -- I'll start and then I'm going to ask Mark to provide a little bit more detail for you. When you think about the brands, one of the first things that we have done is put the proper brand positioning on each one of these brands so that as we approach markets, channels and customers, the brands are positioned right in the market to specific consumers that's -- and again, that's going to vary channel to channel.  Our approach now, one of the benefits of the acquisition is access to both the Rayovac and Varta brands allows us to take a multibrand strategy with the trade, positioning price points to them along a pricing continuum, if you will, that means all those price needs.

And then Mark, maybe a little bit more specifically, why don't we speak to you how we're going to differentiate between the brands in the market?

Mark LaVigne -- Chief Operating Officer

Bill, I think going forward, we are going to lean in obviously with the premium Energizer product. I think as we speak to this business going forward, I think it's important for us to take a holistic view of how we want to approach the battery business in total, because there will be some shifting between Energizer and Rayovac along the way and we want to make sure we just -- we avoid some of that noise and just speak to how we're driving the overall business. When you look at the whole portfolio, Energizer is going to continue to be in the premium position. Having access to Rayovac and Varta is going to allow us to lean in on the value side in a way that we weren't able to in the past.

And so you will see us approach our customers in a way that's tailored to their needs, for their particular shopper and lean in with the value brand. Ultimately, you're going to see Rayovac be more true to that value position. I think in terms of you will -- you're going to cycle off some of those share losses on the Rayovac business here in a couple of months. That should stabilize.

But a lot of the business on the Rayovac side within non-measured. We're going to continue to push some of the opportunities in that area as well. But going forward, it's going to be a holistic approach with Rayovac playing the value brand and Energizer on the premium end.

Alan Hoskins -- Chief Executive Officer

And I think the one thing I would mention; we have held many customer meetings jointly between the two organizations now because we put the two sales forces together.  I can tell you that the trade has reacted positively to our intentions with the brand and how we're going to be positioning them. That's a positive how we manage the mix. I think to Mark�s point, it's going to be tailored customer to customer.

I think one thing I did want to call out, Bill, and this is really important, the past year has really been like leadership over this battery business. At Rayovac, we are now bringing very clear leadership and positioning to how these brands should be run and again, that is being very well-received by the trade.

Operator

Our next question comes from Wendy Nicholson with Citigroup. Please go ahead.

Wendy Nicholson -- Citi -- Analyst

My question has to do with the gross margin outlook for 2020. And maybe it was my fault in modeling and not understanding exactly what the gross margin outlook was for the core business or for the acquired business, excuse me. But bottom line, the 42 to 43% is significantly below what I think industry was expecting. And I'm trying to understand how much of that is just structural to the acquired business.

Does that still reflect inefficiencies at Dayton? And as you look out, let's say, three, four, five years, what's the gross margin profile for the combined business going to look like?

Tim Gorman -- Chief Financial Officer

Yes, Wendy, it's Tim. So you really have to start with the pro formas that we'd put out for '18 and use that as kind of your base. As we move forward, you're going to see -- and it is really what's impacting that is the lower-margin profiles of each of the acquired businesses. The battery business with the value brand has an obvious lower margin.

We do expect on both of the acquired businesses to see improvement over the gross margin rate as we go into 2020.  So if you look back at the pro forma for the auto care, that was roughly a 35% gross margin as reflected in the 2020 outlook. There's roughly a 300-basis point improvement in that margin. And if you look at the adjusted EBITDA for the auto care business, for 2020 it's going to be in the range of roughly 115 to 120 million of adjusted EBITDA.

So that's embedded in the 650 to 675. We do see improvement as well in the acquired battery business, obviously reflective of the synergy benefits that we're going to realize.  And if you look out five years in terms of the combined businesses and kind of replay what Energizer did previously in terms of improvement in gross margin, we would see similar trends as we move forward with again the full realization of synergy benefits, operating improvements. So while we're in the range of 42 to 43% guided for 2020, that will improve beyond that and we would expect over the long-term to get back to roughly in line with where our margin rates have been historically for the legacy business.

In terms of operating efficiencies at Dayton. So I called out in the prepared remarks, we did see margin improvement in the quarter in terms of that business as they exited the unprofitable private label business, as well as operating efficiencies at the site. Obviously, we're entering peak season. And so additional opportunities for operating efficiency improvements will occur after we get through the peak season.

Our focus is really going to be on achieving the high service levels that we believe are necessary to maintain that business. And so, I think all in, we're very, very confident in terms of getting the margins back to where they were expected. I think, again I'd point to it's off of the kind of base that existed from 2018 as we move forward. So I think the rates that were out there were probably a bit ahead of where they needed to be.

Alan Hoskins -- Chief Executive Officer

And I just want to, Wendy, reemphasize the confidence that we have in addressing the operational opportunities in Dayton. If you think about -- since the short time we've owned it, we've gone in and we've really enhanced line efficiencies, we've eliminated a lot of the waste that was in the facility, improved sourcing of raw materials. As Mark alluded to, we've reduced the overflow capacity and we've managed the workforce more efficiently. When we toured the facility, we saw a significant number of opportunities that we believe we can put in play from an operational improvement standpoint that will help us drive continued improvements out of that facility.

As you look at the way we've improved order accuracy that has helped us. To be a little bit more specific, our fill rates are in the high 90s as demand increases as we move into peak season. So our confidence is high. Now I believe it comes about execution in the stores and making sure that product is on shelf and it sells through during peak season.

Wendy Nicholson -- Citi -- Analyst

Fair enough. Thank you very much for all that color.

Operator

Our next question comes from Andrea Teixeira with JP Morgan. Please go ahead.

Andrea Teixeira -- J.P. Morgan -- Analyst

Thanks, and good morning. Can you elaborate on the drivers of the organic sales growth outlook increase that you had from -- -- to three to three and a half percent?  And what are you expecting in terms of net pricing? I understand your commentary about taking pricing. But what are you embedding in the second half versus volume? And how does that compare the second quarter? I believe you said 1% in the second quarter. I want to just double-check that.

 And also, on that volume, please. When you look at the distribution gains, are they solely related to the shelf losses for Rayovac? Or are you also gaining shelf space from your main competitor across all channels? And then on the auto care. Just as a clarification. Can you parse out the impact of discontinuing the unprofitable businesses to the top line? So how did it perform on a like-for-like basis excluding that exit?

Mark LaVigne -- Chief Operating Officer

Let me start with some of these questions. And then if we miss any along the way, just let us know.  I think on the pricing; we have announced pricing in multiple markets. The pricing that you saw impact Q2 in the U.S.

was modest because it was on a limited subset of our product. The pricing we announced going forward in the U.S. is on our Energizer Max and lithium product and that is built into the guidance that Tim provided. We will continue to look at pricing going forward across all of our markets and take it where appropriate.

 In terms of the results of distribution gains that are built into the guidance that we provided, some of that will shift from Rayovac to us. Others will be from other competitors or continued distribution and expansion of space within stores. The private label business that they exited on the auto care business that you referenced, that was most of the top line decline that you saw and a good chunk of the margin improvement that you saw in that business as well. Again, that was a decision that was taken before we own the business, but it was a prudent business decision and one that we agree with.

Andrea Teixeira -- J.P. Morgan -- Analyst

And what would their like-for-like, Adam -- Alan sorry, on that business? On the auto care, please?

Jackie Burwitz -- Vice President, Investor Relations

What would it be including?

Alan Hoskins -- Chief Executive Officer

I'm sorry, can you repeat that question?

Andrea Teixeira -- J.P. Morgan -- Analyst

Yes. So exclude the -- I appreciate the color. But if you exclude the kind of the private label that went away, what would be the like-for-like for the auto care?

Alan Hoskins -- Chief Executive Officer

It's about -- the business would be roughly flat on a like-for-like basis if you excluded the private label.

Tim Gorman -- Chief Financial Officer

And margin and profit would be up. It would be up.

Andrea Teixeira -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

Our next question comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Faiza Alwy -- Deutsche Bank -- Analyst

Yes, hi, good morning. Thank you for the color on auto care and talking about the 115 to 120 million of EBITDA that's embedded in fiscal '20. I was hoping we could get a similar number for fiscal '19. So I'll start with that.

Tim Gorman -- Chief Financial Officer

Yes. So relative to fiscal '19, we're seeing that number down slightly from what you would have seen for fiscal year '18 combined. But we see that, that is relative to performance that existed prior to our ownership. So we're seeing this -- that's just reflective of the partial year results in terms of the EBITDA that we have of roughly 90 to 95 million for the auto care business.

If you annualize that out to a pro forma full year, it would be an improvement over the baseline performance that you would have seen in fiscal year '18 on a pro forma basis.

Faiza Alwy -- Deutsche Bank -- Analyst

OK. OK. And then just one housekeeping question on the cash flow. So I know you've talked about adjusted cash flow.

I just wanted to get a sense of how much of the acquisition and integration costs are cash costs in fiscal '19. And then if there are any cash costs in fiscal '20.

Tim Gorman -- Chief Financial Officer

Yes. So what we've included in the slides, you have a slide that shows what the cash costs are for acquisition and integration costs. And what we called out is 1.5 times -- in terms of the total program, 1.5 times in cash costs above -- for integration costs above -- relative to the synergies being realized. And relative to fiscal year �19, we have called out what the acquisition and integration costs are.

So we called out acquisition costs of 115 to 120 million and integration costs of 45 to 55 million. Embedded within the acquisition costs, that includes a step-up in inventory that's called out in the guidance which would be a noncash cost. In terms of fiscal year 20, we're still finalizing the plans. But there -- those will be relative to the -- in line with the guidance that we gave in terms of the 1.5 times.

You can schedule that out over the next two years beyond '19 in terms of integration costs that we would incur. There would be no acquisition costs carrying over into '20.

Operator

Our next question comes from Jason English with Goldman Sachs. Please go ahead.

Cody Ross -- Goldman Sachs -- Analyst

Good morning everyone. This is actually Cody Ross on for Jason this morning. A quick question on your debt. You guided to 100 million of debt pay down in addition to the Varta proceeds that you plan to pay debt down with.

Can you provide any details about which notes you plan on paying down first?

Tim Gorman -- Chief Financial Officer

It would go against the term loan debt.

Cody Ross -- Goldman Sachs -- Analyst

All term loan? And what about for FY '20?

Tim Gorman -- Chief Financial Officer

It would as well be term loan.

Cody Ross -- Goldman Sachs -- Analyst

Got you. OK. And then your previous outlook prior to this quarter included 4 to $6 million of headwind for tariffs. I did not see any mention of tariffs in the press release.

Given recent events that occurred over the weekend, can you provide an update on the tariff impact for the company? How should tariffs impact your '20 outlook as well?

Tim Gorman -- Chief Financial Officer

Yes. So right now, based on the tariffs as they exist right now, that's consistent with the 4 to $6 million that we called out.  Obviously, with the communication that occurred over the weekend, the impact of those tariffs are not reflected in our current outlook. We would reflect those as more information becomes available in detail on which products are being -- impose the additional tariff.

Our view right now is that with the additional tariffs, that number that we called out 4 to 6 million would probably be in the range of 9 to 10 million. And so again that's based upon -- assuming that those tariffs apply to the products that we've identified previously, again it -- this is kind of a everyday moving target. So it would be challenging to include that in the outlook given the timing in which it occurred. We -- relative to tariffs, we always look to offset the impact of tariffs through either pricing or considering the additional sourcing options for product.

Operator

Our next question comes from Nik Modi with RBC. Please go ahead.

Nik Modi -- RBC Capital Markets -- Analyst

Yeah, thanks. Good morning. Just two quick questions. On Varta, just want to clarify.

So you already have a buyer. Are you just finalizing the process? And if so, who -- can you give us any context on what type of buyer it is? Financial, strategic etc.?  And then the second question is maybe you could give us some thoughts on the innovation pipeline of both the auto care and the Rayovac business now that you've had the businesses for a couple of months.

Mark LaVigne -- Chief Operating Officer

On the Varta process, since we're in active negotiations and in the middle of a process, unfortunately, I can't get into too many details in terms of identity of the buyer, final purchase price, but we are working hard to wrap that up as soon as we can and would expect to have an announcement here in the short-term with both the identity of the buyer and the ultimate proceeds. We've remained confident. We're going to be able to get that done and there's obviously active interest in the asset.  In terms of the innovation pipeline of the acquired businesses, we'll start with battery.

They -- Rayovac and Varta have always had very good products. Obviously, we're separating those businesses and so we are making sure that we set up the divested business for success from an innovation pipeline and they retained assets. They need to run the business and then we get the assets for the rest of the world. They make a very good product.

Their innovation pipeline was healthy. They went about it a little bit differently. We think the opportunity is in some value engineering where we mix and match some of the products between both portfolios. And so, there'll be a nice synergy savings that we had and some of the value engineering opportunities that exist by combining the battery businesses.

On the auto side, their pipeline was, I think what we've said in the past is it was adequate. We're seeing some bright spots in terms of the pipeline. We expect to get in there and invest behind that and really infuse a more robust innovation pipeline than what may exist today. But we feel good about what we have for the line reviews coming up.

Alan Hoskins -- Chief Executive Officer

And Nik, to the broader question across the businesses for innovation, I just want to reemphasize, leading with innovation is going to be one of our core strategies going forward as it has been in the last four years. We put a lot of emphasis in bringing both the innovation and investments behind our brands to drive long-term growth. That will continue across the full portfolio, including the acquired brands. It's a little bit different category to category.

When you look at battery, it's about best overall battery experience. So consumers are looking for long life plus quality, meaning it doesn't leak.  In the case of light, it's a little bit different. It's more around durability, dependability and brightness.

And we've introduced several new lights. This quarter we'll be introducing new lights through the balance of the year. And in Auto, it's really -- it's a little bit different than the other two categories. This is more about keeping consumers vehicles running, looking, and smelling better and doing it longer.

And as consumers are keeping their cars longer, that becomes very important in the sub-segments that we competed in Auto. So overall you can expect that innovation pipeline will remain robust. The five-year cycle innovation plan that we have in place will continue and it will be across all the categories that we compete in, including newly acquired.

Nik Modi -- RBC Capital Markets -- Analyst

Thanks for the call.

Operator

Our next question comes from Robert Ottenstein with Evercore ISI. Please go ahead.

Robert Ottenstein -- Evercore ISI -- Analyst

Great. Thank you very much. Two questions. One, can you talk a little bit about what's going on in e-commerce in batteries in the U.S.

the kind of category growth rates that you're seeing? What your growth rates are? And any kind of changes in pricing and impact to the market? That is the first question.  And second, it sounded like you had a little bit more visibility and confidence in the international growth possibilities of the auto care business. Is that correct? And perhaps a little bit more detail on that.

Mark LaVigne -- Chief Operating Officer

We'll cover off on e-commerce side first. Category continues to grow online. In e-commerce, you saw the category grow 14% and this is specific to batteries. That's roughly 10% of tracked channels.

And about 92% of that in terms of the category goes through Amazon.  In terms of some growth rates for individual competitors, Basics grew at 2%, Energizer grew at 48% and Rayovac grew in the mid-40s as well over that same time period. The resulting shares online over that time period, Amazon was a 27. Energizer was a 28.

Duracell at 11 and Rayovac was at 4. So we achieved share leadership online over that time period.  On the international growth for the auto care business. Obviously, as you -- once you've acquired a business, you learn more and more every day about what the opportunities are.

We feel really good about the international growth opportunities that we have. It's just going to be a question of taking the time to implement them the right way. We have to get through understanding the distributor base, the terms of those contracts and where the markets we're going to want to lean in with distributors versus use our sales force, which is on the ground in various markets. This is something that will be a long-term growth opportunity for the business.

It will be modest in 2020. It's been -- we've built it in as a modest growth opportunity in 2020. But it really sets you up in 2021 and 2022 for some healthy growth rates on the international side.

Robert Ottenstein -- Evercore ISI -- Analyst

Thank you very much.

Operator

Our next question comes from Olivia Tong with Bank of America. Please go ahead.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Great. Thanks. Good morning. Wanted to start with -- on advertising because I guess I'm surprised that you're looking at a 5% of sales for fiscal '20.

We talked a little bit about your thoughts on innovation. It sounds like the Rayovac side of the business, the battery side of the business, you feel pretty good about Auto perhaps a little bit -- needs a little bit more work. But I guess why is the advertising expected to be flat in fiscal '20, if that's the case? I mean there is more of the brand support expected to be above the line? Or will it just take a little bit more time to kind of build into the spending behind the businesses?

Alan Hoskins -- Chief Executive Officer

Olivia, it's Alan. So I'm very comfortable with the 5%. Keep in mind that, that's blended among all the categories that we're competing in. It's going to differ brand to brand, category to category.

You'll find that we'll still maintain similar levels of A&P as a percent of sales, investment both in digital and TV, the way we do on our Energizer Max Ultimate, that mix probably won't change. I mean that's going to be in support of the brand and refresh that you will see out on shelves now.  In terms of automotive, you will see investments in advertising. It's going to depend on the subsegment that you compete in, in the way you reach consumers on the path to purchase, it's a little bit different than batteries.

A lot of that is really going to be tied to more digital and then what we do in store. And for lighting, most of it is around in-store feature and benefit. So it's staggered a little bit category to category. But all in, the 5% blended is the right level for us to be at.

I will tell you, as we look at opportunities to invest more into TV and digital, where we get our best returns, we will continue to do that.  For some of the stub brands, so when you think about Rayovac and Varta, the channels that you're typically selling that into the markets that you compete in, most of the advertising money is put into visual and merchandising because it's around display and visibility and less around top of mind if you typically get to drive in, in those sub-brands, similar to what we do on the operating brand. So all in, we're very comfortable about where we are. I don't -- I wouldn't let the 5% leads you to believe that we're reducing or holding.

It's actually going to be balancing the mix differently. There are some things that Rayovac Varta invested in, in A&P that we have a different philosophy and belief on in terms of how we can drive top line doing that and create better top of mind in aided and unaided awareness around those brands. But most of that is going to be around visual merchandising and less around some of the things that Rayovac and Varta had been doing.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Got it. That's helpful. And then just a little bit of cleanup on the Varta Europe expectations. Obviously, you updated the timing.

I mean how should we feel about any risk that, that can even get delayed every further? It sounds like you're in active negotiation. So as you think about sort of timeline, realizing price, like at what point is there like a line in terms of just getting the deal done?

Alan Hoskins -- Chief Executive Officer

I would say it's a low risk that it delays much further. I think we would expect to have a deal announced in the next month and then, obviously closing in early July. We feel really good about hitting those timelines.

Operator

Our next question comes from Carla Casella with JP Morgan. Please go ahead.

Carla Casella -- J.P. Morgan -- Analyst

Hi. In the guidance for 2020 for 650 to 675 of EBITDA, I guess how much of the synergies is included in that number?

Tim Gorman -- Chief Financial Officer

The amount of synergies that are included in that number are consistent with how we laid it out, how we would realize the synergies. So roughly 10% in the first full year and then the balance of the synergies split between the second and third year. So you have roughly 50 to 55% included in the outlook.

Carla Casella -- J.P. Morgan -- Analyst

OK. And then for this quarter that you just reported, can you give us what revenue or EBITDA would've been if you had auto care for the full period?

Tim Gorman -- Chief Financial Officer

If we had auto care for the full period, I don't really think that's a meaningful number. I'd look at what the EBITDA is going forward under our ownership. And I called out really 2020 is going to be the first full year of our ownership and indicated that, that would be in the range of roughly 115 to 120. I think that's a more meaningful number for you to focus on.

Operator

Our next question comes from Karru Martinson with Jefferies. Please go ahead.

Karru Martinson -- Jefferies -- Analyst

Good morning. You guys talked about not -- this season not being one where you guys control the product instead of selling in from the auto care at the plans that we've had. What do you look at that you guys would do differently? Distribution? New products? How should we think about that business growing into next year?

Alan Hoskins -- Chief Executive Officer

On the auto care business, it is a longer-selling cycle than what you see on the battery side. So a lot of the success that you're seeing in store today were decided last year. What we would do differently in terms of what we've seen out of that business over the last 12 or 18 months, our focus would be squarely on Dayton and it would be the operational improvement that we are now making to that business. So from an overall product portfolio, from a No.

1 share position, I mean those brands are -- they resonate with consumers, they resonate with retailers, they're absolutely the reason we wanted to acquire that business. They reinforce our auto business. They are a powerhouse brands that every retailer loves to have on their shelf. It's the operational execution where we would focus on the improvement.

We're actually going to make sure that we invest behind those brands, behind the branding, behind the products. Maybe there's some opportunity on some of the brands that have some extensions along the way. But those brands are No. 1 for a reason.

We need to make sure we invest behind them and that we operate the same way behind them with our retailers.

Karru Martinson -- Jefferies -- Analyst

And then at the time of the deal, I think you that talked about, about $25 million more of spend that needed to kind of bring Dayton up to the standards that you wanted, where are we on that spend? And are -- and have those initiatives been completed?

Tim Gorman -- Chief Financial Officer

Yes. Since we closed the auto care deal, our integrated supply chain team has been on the ground in Dayton. And with that, members of that team are on the ground.  That was going in with the transaction.

That was the expectation in terms of the amount of capital. Our team is digging deeper into that capital and assessing which elements of that capital spend should move forward. We've -- they've initiated and we're on track for the things that we wanted -- that they wanted done entering into peak season. So we'll assess as we get through the peak season.

We have everything in place that we need to operate at high service levels through this peak season. Once we get through that, then we'll assess the remaining capital that's required. And so that's included in the outlook that we provided for 2020 in terms of the amount of capital spend. We'll assess that as we go through the balance of this year and provide an update in terms of any revisions of that.

I would expect it to go down, not to go up.

Operator

Our next question comes from Steve Strycula with UBS. Please go ahead.

Steven Strycula -- UBS -- Analyst

Hi, good morning. So a quick follow-up question on organic sales. To get to your full run rate, it definitely applies a pretty sizable acceleration in the back half of the year. I'm pretty sure you talked about pricing today, but can you give us some more texture as to how we think about the Americas business picking up relative to international business picking up? And when you said that distribution should be more notable in the back half of the year, is that a big customer win that was incremental to your customer count? Or is that more expanded footprint within existing boxes? And then I have a follow-up.

Mark LaVigne -- Chief Operating Officer

For the balance of the year, you're going to see a couple of benefits. One there's going to be distribution gain. From a distribution, there's no big bang customer when you're going to see roll out. You're just going to see an incremental distribution whether it's improved space, expanded space that you're going to see in our retailers and this is something that we continue to focus on every day with our retailers.

 Pricing will be an element that you're going to see roll through. And then on the international markets, there's not any marketer or any customer of scale that's really going to move the needle in and of itself. But what you're seeing is consistent excellence by our teams executing by going in and getting more space, better space across the globe, which is what you're seeing in the end result with our organic sales growth that we've called out for the balance of the year.

Alan Hoskins -- Chief Executive Officer

We're seeing that growth occur not just in measured channels but also non-measured channels and then e-commerce, both omnichannel and pure-play.

Steven Strycula -- UBS -- Analyst

OK. That's helpful. And then can you help us, in terms of thinking about both for the Rayovac brand and also for the auto care business, where are we tracking right now in terms of distribution to call it, the relevant high watermark for the last 12 to 18 months? And how do we think about, over the next two years, you've been capturing what is probably the appropriate amount of business that you actually want to recapture, some of them maybe lower-margin that you don't want to go after. But can you help us think through about -- through that sequentially?

Mark LaVigne -- Chief Operating Officer

Most of my comments will be U.S.-based. And with the Rayovac brand, it was really dominated in three large retailers, two of which were in the non-measured channels. I think we see the opportunity to continue to expand distribution for that as retailers are interested in a value offering for their shopper. That's something that we can leverage in connection with the Energizer brand as well.

So that's an area of focus, and a lot of it's going to come to life different retailer by retailer, depending upon what their approach is going to be.  In the auto care side, what you're seeing with that business, it's a largely mature distribution network that they have in the U.S. There are some white space opportunities, but that really depends product by product as we look across our portfolio. So there may be some opportunities in clubs.

There may be some opportunities in home center, depending upon what products you are talking about. But it's a -- in terms of the acquired auto care, business largely mature, some areas to improve, which is going to drive incremental opportunity to grow ahead of the category. In terms of meaningful growth percentages and in part because it's a smaller base, I think we would see the auto care side being bigger on the international side.

Alan Hoskins -- Chief Executive Officer

Yes. I think keep in mind as we stressed in our prepared remarks, getting the incremental in Auto is contingent on addressing some of the operational issues that we had. And we have done that. We're very focused on that.

Again, your bill rates are in the high 90s as demand increases entering the peak season. That has to continue. That opens the door for us to leverage the strong category captaincies and relationships our new Auto team members have in the industry. And then that leads to the new opportunities that Mark spoke to.

But you have to address that first, which we've done.

Operator

That concludes the question-and-answer portion of the call. Now I'd like to turn the call back over to Alan Hoskins for closing remarks.

Alan Hoskins -- Chief Executive Officer

Yes. Thanks, operator. And thanks to all of our callers for joining us today and your continued interest in Energizer. That concludes the call.

Operator

[Operator signoff]

Duration: 68 minutes

Call participants:

Jackie Burwitz -- Vice President, Investor Relations

Alan Hoskins -- Chief Executive Officer

Mark LaVigne -- Chief Operating Officer

Tim Gorman -- Chief Financial Officer

Bill Chappell -- SunTrust Robinson Humphrey -- Analyst

Wendy Nicholson -- Citi -- Analyst

Andrea Teixeira -- J.P. Morgan -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Cody Ross -- Goldman Sachs -- Analyst

Nik Modi -- RBC Capital Markets -- Analyst

Robert Ottenstein -- Evercore ISI -- Analyst

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

Karru Martinson -- Jefferies -- Analyst

Steven Strycula -- UBS -- Analyst

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