Energizer Holdings Inc (ENR) 2015 Q3 法說會逐字稿

Good Morning. My name is Frank, and I will be the conference operator for today. At this time, I would like to welcome everybody to the Energizer Holdings Third Quarter Fiscal 2015 Conference Call. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, this call will be recorded. I would now like to turn the conference over to Jackie Burwitz. Please go ahead, ma'am.

Thank you, and good morning, everyone. We are excited to have you join us today for our first conference call as an independent company following the completion of our spin-off on July 1. During the call, we will discuss our third quarter fiscal 2015 results and our outlook for the fourth quarter. With me this morning are Alan Hoskins, the Chief Executive Officer, and Brian Hamm, Chief Financial Officer. This call is being recorded and will be available for replay via our website, energizerholdings.com.

During the call, we may make statements that are 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. Investors should review our SEC filings for a description of the risk factors affecting our business. These risks may cause our actual results to be different from our forward-looking statements. We do not undertake to update these forward-looking statements.

During this call, we will also refer to non-GAAP financial measures. All discussions will exclude the impact of unfavorable currency impacts, the Venezuela deconsolidation, and go-to-market changes. The reconciliation of the non-GAAP financial measures to the comparable GAAP measures is shown in the press release issued earlier today, which is available in the Investor Relations section of our website, energizerholdings.com.

With that, I'd like to turn the call over to Alan.

Thanks, Jackie, and good morning, everyone. Thanks for joining us for our first earnings call here at the new Energizer.

So let me start by providing an update of our spin-off. As many of you know, we completed the separation of Energizer from Edgewell Personal Care on July 1 and began trading as an independent company on the New York Stock Exchange under the ticker symbol ENR. The organization did a terrific job in planning and executing a very complex transaction. This is an exciting time for the new Energizer, and I'd sincerely like to thank all the Energizer and Edgewell colleagues around the globe for their efforts related to a successful separation. Now, we're reenergized and focused on being the best battery and lighting company in the world.

Turning to our financial and operational results for the quarter, and as we discussed during our Investor Day presentation, we are managing the business around three key strategic priorities, leading with innovation, operating with excellence, and driving productivity gains. Now, I'd like to touch base on each of these this morning.

First, leading with innovation, in the quarter, the third quarter specifically, we continued to rollout our innovative EcoAdvanced product, the world's first AA battery made from 4% recycled batteries. EcoAdvanced is performing well, and we now have launched in the US and select European and Asian markets. Year-to-date sales have totaled nearly $30 million, and we have plans to continue our launch activity in key markets across the globe over the next several quarters. Our total value share grew behind this latest innovation, up 1.1% on a global basis, driven by gains in the US and key markets across Europe and Asia. We also continued to invest behind our leading brands and in support of our EcoAdvanced product launch. A&P as a percent of sales increased 270 basis points versus the prior year quarter.

Another strategic priority was to operate with excellence. The organization did this extremely well, as we've successfully completed the spin-off while maintaining focus on the business. In regards to the spin, customer service and supply chain continued to operate efficiently without disruption to our customers. Strategic market exits and shifts to distributors continue as planned, shared service centers are up and running, and outsourcing plans are on schedule. Additionally, in the quarter when we dedicated tremendous resources to effectively execute our spin-off, our organic sales were up 0.1% versus a year ago. During the quarter, our global value market share also continued to increase, up 1.1%, while the category continued to show signs of stabilization, as value is down 0.5% and volume was up 0.1% in the latest 12-week data, both of which are improvements versus the 52-week trends.

Looking at our organic sales performance across the four segments, North America organic sales were down 2.8%, as incremental sales from EcoAdvanced product launch were offset by prior year fill volume activity and a temporary promotional shelf gain that resulted in inflated prior year comps. Organic sales in Asia were up 5.3%, due to expanded distribution. These gains were achieved despite heightened competitive activity in certain markets. Our Europe, Middle Eastern, and Africa organic sales increased 1.7%, due to space, distribution, and share gains in Germany, France, and the UK. And in Latin America, organic sales decreased 1.1%, as pricing gains were offset by modest volume softness.

Our final strategic priority is to drive productivity gains across the business. We continued to execute well against our cost savings initiative, as gross margin increased 200 basis points and SG&A as a percent of sales improved 280 basis points. We have now realized the full run rate savings impact from the 2013 restructuring project, and total project savings exceeded $218 million. This is a tremendous accomplishment for our organization, one that I'm very proud of, but we're not done. We will continue to challenge costs and identify additional savings opportunities, and as we discussed during our Investor Day presentation, we've launched five new productivity initiatives, including trade investment optimization, SG&A improvement, working capital improvement, procurement savings, and integrated supply chain optimization.

Now, again, as I referenced, there is still more work to be done regarding these initiatives, and Brian will now update you on his prepared remarks on those initiatives along with our third quarter financial results and our outlook for the fourth quarter. Brian?

Thanks, Alan, and good morning, everyone. I'll begin by discussing the financial overview of the quarter and provide some insights into our fourth quarter outlook.

As a reminder, our third quarter and year-to-date financial information are based upon carve out financial data and accounting principles. As a result, our net sales, gross margin, A&P and R&D spending are items which are directly attributable to our business. However, certain SG&A cost, interest expense, and spin and restructuring charges are allocated from the parent company and are not necessarily representative of our standalone results. In addition, the balance sheet is based upon carve out methodology and is not necessarily representative of our independent financial position. Our fourth fiscal quarter will be our first quarter with standalone financial data. As a result, most of what we talk about today will focus on net sales, gross margin, and A&P spending.

As Alan mentioned, third quarter results met our expectations, as organic revenue was slightly better than the overall category value performance, A&P spending increased in support of our EcoAdvanced product launch, and we continued to reduce SG&A spending. In addition, we continued to experience significant currency headwinds. We impacted our top line by nearly $28 million and segment profit by approximately $16 million. I'll provide a deeper dive into each of these items.

First, total net sales declined 9.1%, driven primarily by currency, the impact of the Venezuela deconsolidation, and the initial impact of the go-to-market changes. To break this down further, organic net sales were up 0.1%. Incremental sales generated by our new EcoAdvanced product and space and distribution gains in Europe were partly offset by year-over-year declines, due to temporary prior year promotional shelf gains.

As I mentioned earlier, foreign currency headwinds impacted our top line by nearly $28 million, resulting in a 6.7% decline. Venezuela deconsolidation reduced sales by approximately $7 million, or 1.7%, and the impact of our go-to-market changes, including the exit and shift of distributors in certain markets, resulted in a 0.8% decline.

As a reminder, we're executing several go-to-market changes to adjust to our new scale and to allow us to focus on our key markets and customers. As a result, we're exiting China, Sri Lanka, and Ukraine, which have historically operated at a loss or a low level of profit contribution. In addition, we're transitioning to distributors in other subscale markets. Revenue and gross margins are expected to decline as a result of these changes, but the overall profit impact is expected to be accretive, as we're able to offset loss margin with overhead reductions. We expect to realize the majority of this impact in the upcoming four quarters. The market exit should be fully realized in the earlier part of that time frame, while the distributor transition may be more protracted. Furthermore, the level of sales in the impacted markets over the next four quarters could be somewhat variable, as we transition from a direct sales model to our new in-market partners and supplier distributors with sufficient pipeline fill inventory.

Now, on to gross margin. The gross margin rate for the quarter was 45.6% or 111 basis points below prior year. The decline was primarily driven by the impact of currency, as most of our finished good inventory is denominated in US dollars, which unfavorably impacts the gross margin rate as foreign currencies weaken. Gross margin was also negatively impacted by the removal of Venezuela from our consolidated results, as a result of their previously announced deconsolidation. Excluding the impact of currencies, go-to-market changes, and Venezuela, our gross margin rate increased nearly 200 basis points, driven by continued cost reductions and modest commodity price favorability.

A couple of other items to note. A&P spending as a percent of sales increased 270 basis points in support of our brands and the EcoAdvanced launch. SG&A as a percent of sales on an ex-unusual basis improved 280 basis points, as we executed on several initiatives in an effort to right-size our cost structure and offset dissynergies resulting from the separation. EBITDA on an ex-unusual basis was approximately $79 million, and EPS on an ex-unusual basis was $0.64. There were also several one-time or unusual costs which impacted the quarter, including cost associated with the spin and the 2013 restructuring initiative.

Spin related charges in the third quarter were $76 million. This represents an allocation for carve out purposes from the parent company. Costs from the 2013 restructuring project in the quarter were $19 million. These charges were primarily related to the closure of our Tianjin manufacturing facility, which we announced during the third quarter. Costs related to the 2013 restructuring are nearly complete, with less than $5 million of additional cost estimated for the remainder of the program. In total, restructuring costs for the entire project related to our business are estimated to be approximately $205 million, while savings have totaled more than $218 million.

That wraps up our commentary on the quarter results. I'd now like to turn our attention to the future outlook.

As we discussed during our Investor Day presentation, expanding margins and continuing to take out costs are critical to our future success. In support of these goals, we are making excellent progress against the five productivity improvement initiatives we previously shared with you.

First, trade investment. This is a multi-year process, and we are at the beginning of that journey. We've installed a dedicated revenue management team with accountability for pricing and pricing architecture. We believe this will help drive profitable share growth, by helping us analyze and more effectively invest our trade investment dollars.

Second, SG&A. Shared service centers are up and running, go-to-market changes are nearly complete, and we are finalizing our zero-based budgeting efforts for the upcoming fiscal year.

Third, working capital. We are continuing to review areas to improve overall working capital and are beginning to execute against our SKU management project in an effort to improve days in inventory.

Fourth, procurement. Our team is in place, and we're continuing to execute against the targets and initiatives for the upcoming year.

And finally, we continue to optimize our integrated supply chain structure. As I mentioned earlier, we recently announced the closure of our Tianjin manufacturing facility, as we continue to move production into our most high-tech in cost efficient facilities, simplify our supply chain, and balance internal manufacturing with third-party sourcing.

As we discussed on Investor Day, it is important that we successfully execute against these initiatives, as we expect there will be a period of transition over the upcoming few quarters, as we execute our go-to-market changes, including market exits and shift to distributors in certain subscale markets, [lap] the impacts of the Venezuela deconsolidation through the second quarter of fiscal 2016, and finalize tasks related to the separation from Edgewell. We've began to realize the impacts from these items in the third quarter, and our results will continue to be impacted over the next three to four quarters.

In addition, we have been experiencing significant currency headwinds, which we anticipate continuing over the same time period. As it specifically relates to the upcoming fourth quarter, as you can imagine, there are several moving parts within our cost structure and overall P&L, as we recently completed the spin. Historical cost information is based upon carve out data, and we are finalizing our zero-based budgeting efforts for the upcoming fiscal year. As a result, we will not be providing fourth quarter EBITDA and EPS guidance. However, we did want to provide visibility into some of the key drivers for the upcoming quarter.

First, international go-to-market changes are estimated to have an unfavorable impact on net sales in the mid-single digits, due to the exit from China, Sri Lanka, and Ukraine and shift to distributors in certain subscale markets. However, the bottom line impact from these changes is expected to be minimal, as overhead reductions are expected to offset a significant portion of the gross profit decline.

Next, the deconsolidation of Venezuela will reduce net sales by $5.6 million and segment profit by $2.7 million. And based upon recent exchange rate versus the prior year, we expect net sales to be unfavorably impacted by $25 million to $30 million and pretax earnings net of the hedge impact are estimated to be reduced by $12 million to $15 million.

In addition, organic revenue is expected to decline in the mid- to high-single digits, due to a difficult prior year comparison. As you may recall, last year's fourth quarter organic net sales were up 4%, despite a 3% decline in the category, driven by the timing of early holiday deliveries and a temporary prior year promotional shelf space gain that will not be repeated this year.

Gross margin rate is expected to decline by up to 300 basis points, driven primarily by currency, Venezuela deconsolidation, and the go-to-market changes. As previously discussed, most of our finished goods are denominated in US dollars, which unfavorably impacts the gross margin rate, as foreign currencies weaken. In addition, removing high-margin Venezuela results, due to the deconsolidation, negatively impacts our overall gross margin rate.

Finally, we expect to incur approximately $25 million to $35 million of one-time spin cost, including international tax charges, through the end of fiscal 2016, as we finalized separation activities. The majority of these charges are expected to be incurred in the fourth quarter.

It's important to highlight that the outlook related to these items is consistent with what we shared during Investor Day. Our future adjusted base EBITDA outlook for fiscal 2016 of $310 million to $325 million remains unchanged. We recognize it will be challenging to understand our results, as we go through this period of transition. We are committed to providing the visibility, clarity, and understanding on the underlying heath of the business and its key business drivers.

In order to help with comparability of our financial results and to assist in the communication of the expected impact from some of these items, we have provided supplemental schedules within our press release, which sets forth our historical quarterly financial information, based upon the Form 10 filings, and the impact for the next three quarters, as it relates to the Venezuela deconsolidation.

We are finalizing our plans for fiscal 2016 and will share our financial outlook for the upcoming fiscal year during the November earnings call.

Now, I'd like to turn the call back over to Alan for closing remarks.

Thanks, Brian. As we have stated, the fourth quarter will be transitional, as the new Energizer begins to execute our plans as a standalone company. We will continue tight cost controls and optimized trade spending, while identifying new profitable distribution opportunities to strengthen our business. Now, despite the top line challenges, we remain confident in our strategies and believe that we're well poised for a successful fiscal 2016 and beyond.

So for our audience today, this completes our prepared remarks, and we'll be happy to take your questions. I'll take turn it back to the operator.

Thank you, sir. (Operator instructions). Bill Chappell from SunTrust. Please go ahead, sir.

I guess starting off, as we look into the upcoming holiday season, maybe you can kind of give us an idea of market share gains, losses, whether Eco is having a meaningful impact in helping get back some of the -- or get some incremental shelf space as we go into the holidays and just kind of your initial take. I know we're still four months away, but probably two months away from shipments.

Yeah. So we're going to be lapping share gains from the prior year. I think that would be your starting headline as you think about heading into the first quarter, fourth quarter, first quarter. As you know, we lay our plans out with our retailers roughly 52 weeks in advance of execution, so a lot of what has been committed is now being planned for execution in the stores. We feel good about the plans that we have with our retail partners, particularly in developed markets, where that has the most impact. And right now, Bill, heading into that period, we do have good share momentum again, but we've got pretty big things that we're going to be lapping coming up that will impact share, as we head into that fourth quarter.

Yeah, Bill, it's Brian. Just to build on that a little bit, as we stated on our prepared remarks, we were expecting a mid- to high-single digit organic decline. It's really based upon what we're lapping from the prior year. There was a temporary shelf space gain, the promotional shelf space gain that we had last year, that drove a plus 4% organic growth in a down 3% category in the fourth quarter of last year. We chose not to repeat that, and so we do expect some share decline in the fourth quarter. But share is going to ebb and flow. What we're focused on is continuing to run the business the right way, invest wisely, and share will take care of itself.

Okay. And then just on kind of uses of cash, I mean, I think you've laid it out at the Analyst Day, but any update? I don't even know if you've been allowed to do share repurchase since the split, but kind of your thought process going forward, and would you maybe more aggressively bring cash over from international to do that in the near-term?

Yeah, the uses of cash, or the priorities of uses of cash, remain consistent with what we shared on Investor Day. It's reinvest in the business, it's return capital via a meaningful competitive dividend, opportunistic share repurchase, and then selective disciplined M&A.

Specifically, as it relates to your question, the company formed on July 1. We were definitely in a blackout period until we released results. And so we have been out of the market, but our thought on share repurchase is consistent with what we shared on Investor Day. We'll look opportunistically, weighing short-, mid-, and long-term cash needs to determine how best to drive long-term value to shareholders.

As far as bringing international cash back, it's something that we continue to look at all the time, as to what's the best use of that cash. Obviously, if you were to bring it back, you would pay a tax hit on it, but it's something that we're continuing to look at and discuss very frequently with our Board, as to how best to put that cash to use.

I'll turn it over. Thanks so much.

Steve Powers from UBS.

I want to make sure I understand the revenue guidance for the fourth quarter correctly. I think those items that you walked through are, if I am not mistaken, effectively additive. So it appears you may be guiding revenue down as much as, like, 20%. Is that the correct read?

Yeah, those four moving parts are additive. We said currencies will continue to be headwind of about 5.5%, the go-to-market changes will be down about 5%, Venezuela will be down 1%, the organic will be mid- to high-single digits. And so, if all these play out, you're looking at a range of total revenue down 17% to 20%. But all of these are consistent with what we shared during Investor Day. There will be a period of transition, as we finalize the separation, and adjust to our new scale, and focus on the key markets and the customers.

Okay. As you look forward to 2016, especially on the go-to-market and the organic, any early indicators or sort of the cadence of growth, as you looked across 2016?

Yeah, so Steve, it's Alan. Just to chime in on that, we had, on Investor Day, provided our outlook that we anticipate the category would continue to decline low single-digit. We have seen some stabilization in the category starting in January of 2015 that has held pretty steady from that point quarter-to-quarter all the way through the May reporting period. We do anticipate, though, as we think about our long-range planning, we are anticipating to build into our model that low-single digit decline, even though we're seeing some stabilization in the category right now.

Okay. Fair. And I know there are lots of moving parts, but is there any help you can provide us, in terms of what the go-forward kind of SG&A run rate is likely to be, either as it relates to Q4 or next year, as you kind of finalize the P&L? I think that would be helpful as we just kind of validate our estimates. And then going back to the top line, any color you might be able to provide in terms of the regional details, pockets of strength, pockets of relative weakness versus your base case? Thanks.

Yeah, Steve, I'll go ahead, and let me answer the latter question, and then I'll turn it over to Brian on SG&A.

So as we look at the markets, right now, as I indicated, we are seeing some stabilization in both category volume and value, since the January period, and that has been pretty consistent up through the May reporting period. We do anticipate that will continue in some markets but not all. At this point, we are seeing some shifts in category performance. So as an example, global volume right now is up 0.1%, and that's the latest 12-week total household battery, value is down 0.5%.

When you look at the US, just to pick the largest battery market in the world, US volume is down 1.6%, value down 1.3%. We don't anticipate that trend to shift too much, and given the scale of that market, you would anticipate the current trends we're seeing to hold or move more toward that low-single digit that we're projecting. Now, as you look at the breakout of markets, developed markets are actually down 1.4% in value in the latest 12 weeks, and that's a pretty similar trend to what we have seen in previous reporting periods. However, in developing markets, in the latest 12 weeks, they're up 4.7%.

So we anticipate going forward as the new Energizer. We put a lot of emphasis in our go-to-market model in defining where we want to play to win. And that meant leveraging our global footprint and where we knew we could build our two brands and do it in a very effective way. This will entail continuing to really drive profit out of our developed markets, and where we have opportunities to expand in certain developing markets, we will pursue those opportunities. We still believe there's growth opportunities to offset some of the decline we're seeing in developed, and developing will do that. It just takes a while, though. Those are typically slow builds, when you invest in those types of markets.

And on the SG&A, I'll turn it over to Brian, but I can tell you, as we said at Investor Day, when you think about the shape of the P&L going forward, our objective is to maintain or improve SG&A as a percent of sales. But I'll let Brian provide a little bit more color on that.

Yeah, as you can imagine, there are several moving parts, as we separate a global organization from Edgewell. At this time, we're not able to provide more detail on SG&A than what we provided during Investor Day. However, during the November call, we will provide that detail.

Just a couple of other comments on sales by area, to build on some of Alan's comments. In North America, in quarter three, organic sales were down 2.8%. We had the benefit of EcoAdvanced, but also lapping some prior year fill activity and also that promotional shelf space gain that we talked about earlier. In Latin America, sales were down about 1%. We've seen pricing, but also some modest volume declines within EMEA. Some really nice distribution in self space gains in key markets across EMEA for us. And then Asia, despite heightened competitive activity that we see in some of those markets, specifically Australia, we have nice revenue growth within the quarter.

Chris Ferrara from Wells Fargo.

I just wanted to go to A&P for a little bit. So $35 million spent in A&P. Obviously, that's a really big number, 9.4% of sales, bigger than Q1 even. And I get EcoAdvanced needed support, but is this indicative of what the run rate would be when you adjust it seasonally, or do you think this is a particularly large spend number for the quarter?

Yeah, hey, Chris. It's Alan. Great question. It's actually large for the quarter, because of our expansion of EcoAdvanced into new markets. That is going to require A&P support to drive both awareness and build trial with consumers. You would expect, as we announced on Investor Day, I am planning on A&P as a percent of sales to be in a run rate around 6% to 7%. Now, keep in mind that will ebb and flow, and it ebbs and flows with competitive activity, and it's contingent on any new innovative launches that we have in our cycle plan that will be forthcoming. So you can see that A&P move out of the range higher if we're launching new products, and it could potentially move lower, if we chose to reinvest that money into something different, perhaps driving awareness in-store on path to purchases as opposed to above the line with TDC.

But as you think about the EcoAdvanced launch, and really back to Steve's question as well, we're actually really pleased with the launch to date. We've got roughly $30 million in shipments year-to-date through June, and we've got over 1 billion impressions in the market. At this point, what we're very pleased with is the A&P investments that we made have given us strong consumer repeat purchase rates, and well above new product launch norms, which we're pleased with. The same with brand awareness tracking, it's ahead of new product norms. We are seeing a key boost and key brand metrics, such as long-lasting and innovative. And at this point, we're really pleased with the launch. We're sitting right around a 1% value share in both the US and Canada. It's actually higher in other markets where we've launched, such as Australia and the Nordics. And really going forward, we plan now to move more toward tactical elements of the plan with our trade partners, as we increase both the level of visibility and merchandizing in-store.

But as you go forward, the way to think about A&P is this. In our category, brands really do matter, and it's important that you support them with A&P investment for a couple of reasons. First, you want to be able to maintain the healthy margins that we realize in the category. And second, you've got to be able to bring, at least from my experience, both brand news and the innovation to both trade and to consumers, so that you can avoid just a discussion around price and product only, and we think that's important.

So going forward, we will continue to invest heavily in our new innovation, and we believe it's the right thing to do. And candidly, we're pleased with the results that we are seeing, both in improvements in our brand equity measures and our measured market share to this point.

That's really helpful. And I guess as a quick follow up, I mean, first back to the A&P, does 2016, because you will still be supporting EcoAdvanced, does that look to be an above trend year or a high enough trend year? I guess, and then more specifically, on EcoAdvanced, can you just talk a little bit about maybe the performance profile, the margin of that brand, once you get past initial heavy spending, what it looks like? Obviously, it's focused for an eco-focused customer, right? How mainstream can it be? How big can it get? That would be great. Thank you.

Yeah, so let me start with the latter part. I may even ask Brian to chime in on a couple of the questions you had there.

So with EcoAdvanced, the way to think about it is, when we approach the category, we use consumer insights. And I won't belabor it too much, but what those insights let us do is really leverage and capitalize on the consumers' expanded definition of performance, which includes long-lasting performance plus quality, reliability, and responsibility. And that's what the EcoAdvanced brings is really all four of those consumer needs. We plan on continuing to launch EcoAdvanced in select markets around the world. I wouldn't anticipate you would see this everywhere. As you would imagine, there are some developing markets where that particular price point just doesn't make sense.

One of the things that we like about EcoAdvanced is it's actually contributed to accretive value growth in the category as a launch, and it's allowed us to really expand our brand in-store, both in distribution and in visibility to both consumers with our customers.

So we're really pleased with what we've done with it to that point. Going forward, we will continue to develop that product. And there's a number of things that we're working with, both in our procurement and marketing teams, to continue to drive down the cost of that product from the initial launch. That's in our current plan, and those plans will be executed over the course of the next 12 to 24 months.

I don't want to get too much into the margin, as you would imagine from a competitive standpoint, but what I can tell you is, we are pleased with the margins that we're generating from this particular launch, and as we continue to drive down our product cost, we anticipate that that margin will be able to hold or improve over time.

And I'll turn it back over to Brian for little bit more color on the other questions.

Yeah, and just to build on Alan's comment really quick, EcoAdvanced is our entry into the performance alkaline segment of the category. That performance alkaline segment of the category is up 20%, north of 20% over the latest 12 weeks, and it's helping the overall category, because it's providing solutions to consumers and news to the category that's good for us and also good for the retailers as well. As far as the level of A&P support to expect for 2016, I'm going to defer that until the November call when we provide our financial outlook and some of the key P&L drivers in lines and in elements of the 2016 outlook at that time.

And Chris, the reason for that delay, in part, is we have other things in our cycle plan of innovation that will require A&P investments. So there's some moving parts to that that we're going to have to spread differently.

Thanks a lot. I appreciate it, guys.

Bill Schmitz from Deutsche Bank.

Hey, can you just talk about what your views are on channel inventory right now? And then one of your competitors had some pretty promising comments in the category, saying that aggressive promotional spending doesn't really drive consumption. And so it sounds like at least one competitor is going to get rational, and I know it's probably too early, and you're probably sick of the question, but any sort of read on how the new Duracell is going to behave? And then I have a follow-up, if I can.

Okay. I'm going to take a pass and ask Brian to chime in, Bill.

So first, the views on the channel inventory, inventories right now, depending on the channel, some channels can be a little high, other channels are actually appropriately inventoried. A lot of that, believe it or not, has to do with storm builds and how storms come into play, as well as the timing in which shipments went in for holiday and how that inventory flowed through. And again, it's different channel to channel. Overall, we feel that inventories with the retail trade will continue to normalize over the next few quarters. I think that's the best way to summarize it for you.

On promotional spending, let me kind of address it for you this way. As we think about promotional spending at Energizer, we partner with our retailers, as I said, for larger retailers, at least a year in advance in setting both their promotional and merchandizing plans. We typically, in our joint business planning sessions with them, try to align to their strategies. But as a part of that strategy, our revenue management team, that Brian alluded to earlier, really evaluate and assess our choice to participate in some of those promotional activities, contingent on the ROI that they generate.

Promotion has been and will be a part of this category going forward. It's part of the mix that all high, low, and hybrid retailers use, as you know, across consumer package goods. We don't anticipate the competitive activity changing.

But I will tell you this. Energizer, from a category view, will really continue to focus back on those three strategic priorities. And the simplest way I can say that is, leading with innovation will be that top priority. And we believe that's important because -- and again, as I mentioned earlier, it allows us to talk about more than just product and price. It brings very well-needed and appreciated news, both marketing and innovation, to the category for both our customers and consumers. So you'll see us continue to focus our efforts as an organization on that particular tenet within our strategic plan.

Certainly, driving productivity and operating with excellence will be critical to the success in launching all that new innovation. But again, our focus is going to be primarily on building what we call quality share, base building share, and we do that along the path to purchase. So think about that as high return TDC. We generate our best returns in TDC. We'll continue to focus on that. Path to purchase is really increasing both the visibility and availability of our products in-store to consumers and shoppers, which are quite different. And then finally, we'll recap that with very strong execution programs with feet on the floor in stores around the globe, depending on the customer and the channel, but that will be a key focus for us going forward.

And then finally, in terms of the new Duracell, Duracell has been, and will continue to be, an aggressive competitor, regardless of the ownership. But again, I think as you see the new Energizer going forward, we remain focused and dedicated to the three strategies that we put in play. We plan to play those by our rules, our way, and believe and are confident that, in doing so, we'll be able to continue to build share and do it in a very profitable way in our business by expanding distribution and increasing the visibility and availability of our products.

Okay. Great. Thanks so much for that. And then I think Chappell sort of asked the question, but I just wanted to chime in also. So when do you guys think you're going to start using the balance sheet more aggressively? I mean, how long is the transition period going to take? And then I know M&A was one of the uses of cash in the Investor Day presentation, and I'm curious if you guys are actively looking at acquisitions now, or do you think you're going to sort of take a breather for a while, as you get the spin completed?

Yeah, Bill, it's Brian. Just as we stated in Investor Day, it's a balance between all three. It's investing in the business, returning capital with dividends and share repo, and then, if the right M&A opportunity comes about, then we'll definitely take a look at it. We're 36 days post-spin, but we've hit the ground running. And how best to utilize cash is something that we talk about every single day and also talk about very closely with our Board. And so it's definitely top of mind. We recognize that returning capital to shareholders via a dividend and share repo is critical ways that we deliver value. But it's going to be a balanced approach.

And then, if you don't mind, just to chime in on M&A real quick. You asked the question about potential prospects. Let me just talk briefly about the way we're thinking about M&A. And it's really about the right business at the right time, the right price, and the right place. And let me just clarify what we mean by that.

So the right business is, again, within the household space, looking for strong brands in household categories that have a really good track record of innovation and good channel overlap with our core business, which is batteries and portable lights. The right time is really about making sure that we balance M&A with the other priorities we have in our business and target businesses with a profile, a similar profile, CapEx profile, as an example, that allow us to quickly capitalize on the cost and revenue opportunities. Third, around right price, we certainly have a disciplined M&A team in place that has done this before. And they are going to be very focused on acquiring good businesses at fair prices, but also consider our desire to make sure we maintain a healthy balance sheet. And then finally, from a placing standpoint, think about this in the context of the fact our organization just did a significant amount of work around go-to-market changes, and that was included the decision to exit certain markets and move to distributors in others. We believe this will allow us to better focus on our top markets and key customers, but as a result of that, we see an opportunity where we can leverage new businesses with geographic overlap to potentially expand into new opportunities that we believe will be important going forward to the expansion of our brands around the world.

Olivia Tong from Bank of America Merrill Lynch.

Appreciate the detail on the international markets, and just noticed that the organic sales, they're really lumpy by quarter. Has that always been the case, or is there something specific going on this year? And then how do you think about the category growth rates by region going forward?

Yeah, I'll take the first and then pass it over to Alan for outlook going forward.

A couple of things at play is that in Latin America, obviously, there is a lot of volatility within many of the markets in which we operate. And then also, just the overall small scale within Latin America is that small numbers can drive a big percent change on a year-over-year basis. But what we've consistently seen, within Latin America, is the ability to continue to take price, but volume has declined, because of some of the economic challenges within many of those markets.

Within EMEA, we've made good inroads in gaining profitable share and in good distribution and in shelf space gains within the key markets that we're focusing in on. So for the last three quarters, we're very happy with our performance within EMEA.

Within Asia, it's a very competitive environment, especially within Australia. We've seen competition really heat things up, and that's really the reason for some of that quarter-in, quarter-out volatility.

And then, Olivia, just to expand on the second part of your question in terms of sort of anticipated, it's really hard to project what the trends will be going forward in each of the key regions, but here is the way you may want to think about it. If you look at the trends in North America, both volume and value have been down low-single digit. I would anticipate that likely would continue.

Europe, we've seen, if you look at the latest 52-week, you've seen both volume and value relatively steady, units up higher than value, driven predominantly by certainly private label in certain markets, but also because of some of the promotional activity that had occurred there. Latin America, you're certainly seeing value up. A lot of that is attributed to your hyperinflationary and pricing actions that are taken in those markets by different brands with volumes down. And I think, as Brian alluded to, the big surprise in having run this region, I think it's finally catching up to Asia, some of what's happened to the category around the world. We're seeing both volume and value down. I would anticipate that low-single digit decline to continue as well. And I think a lot of that, on the value front, is really driven by the competitive activity we're seeing among new trade entrants into that market that is a new challenge for the existing type retailers like the Woolworths or [Kohl's].

And really quickly, Olivia, on North America, I forgot to mention is that we have seen year-over-year results bounce around quite a bit. In quarter one, organic sales were down about 14%, quarter two, up 2%, and then quarter four, down 2.8%. There's a story behind each quarter. In quarter one, we were down, as holiday deliveries shifted to quarter four of 2014. So those holiday deliveries that, in prior years, were in quarter one and quarter four of 2014, shifted. And then also, we had some retail inventory reductions. In quarter two in North America, we were helped with the launch of EcoAdvanced. And then we talked about quarter three, and then our outlook for quarter four is that we're lapping some aggressive prior year comps and plus 4%, when the category at that time was down 3%.

Got it. That's very helpful. And then with the incremental or the gains that you've gotten from EcoAdvanced, have they come from your existing products, or do you think that you got some more shelf space with that? And then earlier, you had mentioned that you think that there's probably a bit more inventory in the retail channel. So going forward, at least for the next few quarters, would you expect, at least for next year, to ship below consumption?

Yeah, it's a great question. So first on the EcoAdvanced. Any time you launch a new product, you are going to see some sourcing of volume from your own existing brands and competitive brands. That has happened, as you would imagine. But what we're pleased with is, we're actually seeing some incremental from that launch of EcoAdvanced, which was important. When we did a lot of our basis work, we actually found that this would be incremental to the category, and in a lot of the markets, that franchise effect is playing out the way we had hoped. A little less so in the North America, because we're introducing a new segment, if you will, in performance alkaline, and there has been some catch up in terms of the space that should be allocated to that brand, which we expect to see occur over the next several quarters.

So EcoAdvanced will certainly hold its own. What we're pleased with is, when we look at the launch of that product versus new product industry norms or competitive launches that would have been similar, not only is it holding its own, it's actually exceeding in some of the key measures, so we are pleased with that.

In terms of the inventory, you can expect that to ebb and flow over the next couple of quarters. Certainly, as we head into holiday, there's usually a build that will occurs, as retailers get ready to execute against that. In terms of the EcoAdvanced itself, we do have some inventory we'll be flushing through over the next several quarters. But we expect that to normalize. Personally, I don't have a concern about the inventory levels on EcoAdvanced and the impact it may have on future sales.

Got it. Thanks. And just lastly, just for modeling purposes, the corporate expenses that come from legacy [ENR] to you guys, is that about $15 million a quarter?

What we said at Investor Day is that the parent company had corporate expenses of around $135 million to $140 million. A reasonable estimate is about half of that. But again, we're still finalizing our budgeting efforts for 2016, and I'll be able to give you a lot better number during the November earnings call.

Kevin Grundy from Jefferies.

So my first question is on margins by segment. So the margin gap in LATAM and EMEA versus some of your developed market segments, how much of that gap can you close and over what period of time?

Yeah, it's definitely a focus for us. When you look at LATAM, decent gross margins, however, the high inflationary environment within several of those markets, so our SG&A spend is pretty high within Latin America. What we're doing as far as some of the go-to-market changes, and also as part of the moving to shared services, and then also moving to outsourcing in certain transactional functions, hopefully, should help that, right, because it allows us to deliver those services to that market from other markets, hopefully, at a more favorable cost. It's plans that we have in place now, and it's going to continue to be an area of focus for us going forward.

Same with EMEA. EMEA, it's complex to do business, multiple currencies, and just a complex overall business market within some of those geographies across EMEA. It is a focus for us. Again, the go-to-market changes, and also moving to shared services, and also outsourcing should help that. But it's something that is a priority of ours now, and we'll continue to attack into the future.

As far as a specific timeframe and a specific amount as to how much of that gap we'll be able to close, again, we're still going through our ABB process, and then we'll be going through our long-term strat planning process in the coming months. So I'm going to hold off on getting some specifics until we complete both of those exercises.

Okay. Fair enough. And then, Alan, thanks for the M&A commentary earlier. That was helpful. Are there any categories, I guess within household, and most notably, in batteries as an example, are you philosophically opposed to increasing your battery exposure through M&A, or should we think about this you're going to be looking for higher growth, higher margin sort of accretive category, if you were to pursue M&A?

Yeah, so M&A, it's going to be whatever we do, it needs to be margin accretive. And think about the profile as being similar cash profiles. You want that stable cash flow coming in. We do want businesses that had similar CapEx profiles, the ability to leverage our global footprint, the ability to be able to build brands in the markets that we entered that are either new markets or existing markets. And one of things I talked about during the road show that I think it's important to call out in M&A, we really want to look at M&A across the value stream, to make sure that we can truly benefit from both the synergy, the cost, and revenue opportunities that might exist in whatever company we choose to pursue.

It's really hard to comment on sort of hypothetical acquisition in terms of what that would look like, so I'd have to default now until we took a decision to do that. But I will tell you, we work very closely with our board of directors in terms of assessing opportunities as they come up, and we'll continue to do that as well into the future.

In terms of giving you specific categories, I'd hate to throw a wide net to you the way I have, but just think household space. We believe that that's where the potential opportunities are for us to capture true synergy, as well as to maximize, again, our global footprint in the way we go to market.

Nik Modi from RBC Capital Markets.

Just want to touch on the trade spending. So you talked about promotional efficiency as part of this potential savings opportunity. Can you just help us quantify just the overall buckets in that spend pool? And then the other question I had, just quickly on the licensing business. I mean, the brand, obviously, has been invested in a lot. I'm sure there would be other companies that would love the Energizer brand name on their products just to show the credibility. Can you just give us some thoughts on that part of the business?

Yeah, so Brian and I will tag team for you on this one, Nik, if you don't mind. And let me kind of provide some color, and then Brian may have a little more detail for you.

So as you think about trade investment, it's certainly a big investment bucket for new Energizer. One of the things, and having spent a lot of time in this area myself over the years, that we're really going to look at is a combination of both the pricing architecture as well as trade promotion efficiency. And really, what we've done with the revenue management team is, we put a group in place, and they are charged globally to look not just system and process, but overall strategy and approach to how we think about trade investment going forward.

We did do some initial work during our previous restructuring that was able to drive out some inefficiencies in the way we spend money. In this last go-round, we took it a step further and identified just trade promotion, and think about this as non-invoice spending. And really understanding where we are getting the best lifts and the best returns on those investments, we've been able to really quantify that and qualify it, and then take those best practices out to other markets around the world.

That's the point we are at right now. Think about this on trade investment, because we're considering both architecture and post-promotional analysis, this is more than a one year journey. And as a courtesy to Brian and the team, I'm really giving them a little bit of wiggle room to step back and define what we think the quantification would be of that initiative. It's a little hard to put your arms around right now. We brought a partner in to work with our revenue management team. They are sitting down now and going through both strategy and clarity of scope of work to define exactly, not just the scope of work, by putting numbers against that in terms of targets we believe we can aspire to over time. But again, this will be a multi-year journey in terms of trade investment.

Brian, I don't know if you have anything you'd like to add on that.

Yeah, just a couple of things, Nik, is that I'm going to stay very close to this one. In my previous company it's an area and a relook, and a revamp that I led in my previous company. This is a big opportunity for us. But the team has just been put in place, and it is definitely a multi-year journey. We're going to do this the right way and for the benefit over the long-term. It's going to be very difficult to quantify exactly that size of the opportunity, because a lot of it depends -- and I know you know this, it's how companies set their list pricing, and then that's going to determine how much is your on-invoice and post-invoice spend.

So we're looking at this thing, we're starting with list price strategy and architecture building -- going to pricing architecture, pricing tiers, folding into how we're going to invest with our key customers. We're taking a comprehensive look at this, and we'll continue to provide more insight and details as to how we're progressing with this journey. But it's definitely a top priority for the organization.

And we understand that there's a desire to understand that, and we empathize with our audience on that. Keep in mind, though, that we are truly global, selling into 140 markets around the world. It's not as simple as a one US base list price structure that we can go in and modify. We actually have to literally go in market to market and assess and understand how that pricing is set up, not only to direct retail, but to our distributor network as well. So it's take a little bit of time. To Brian's point, we want to do this once and do it right, and that's why we're not able to quantify today. We really want to give the team the proper time to put the scope of our work documents together.

Nik, to your second question, just real quick on the licensing business, so today, it's roughly $10 million in revenue for us. But as I had mentioned both at Investor Day and during the road show, we actually this as an opportunity. I think you're spot on. You'd be amazed at how many requests we get each week on can we use the Energizer or Eveready name on our products. But we do want to make sure that we're selective. There's a pretty rigorous qualification process we go through internally. We've actually been able to set up a best practice that the industry is using now in assessing partners and licensing. But think about it primarily in the space of power and light. We may expand that depending on what our future portfolio looks like, but today, we're really going to try and stay in that space of power and light. We believe that the Energizer and Eveready names lend themselves well to that particular segment of categories.

Great. Thanks, guys.

This concludes our question-and-answer session. I'd now like to turn the conference back over to Alan Hoskins for any closing remarks.

Great. Thank you, operator. So on behalf of the new Energizer, we'd like to thank you for joining us on our first earnings call. As Brian has alluded to on a number of occasions, you can anticipate this to be the norm, where we're providing as much transparency as we can to you on the business, with some foresight in terms of where we'll be taking the business. But all in, we do appreciate your time this morning and calling in to listen, and thank you for your questions and your interest. We look forward to communicating with you in the future as well. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.