Energizer Holdings Inc (ENR) 2016 Q1 法說會逐字稿

Good morning, everyone. My name is Jamie, and I will be your conference operator today.

At this time, I would like to welcome everyone to Energizer's first-quarter FY16 conference call.

(Operator Instructions)

As a reminder, today's event is being recorded.

At this time, I would like to turn the conference call over to Jackie Burwitz, Vice President, Investor Relations. Ma'am, you may begin your conference.

Good morning, and thank you for joining us.

During the call, we will discuss our fiscal first-quarter results, and provide an update to our outlook for FY16. With me this morning are Alan Hoskins, 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. Those risks may cause 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. A reconciliation of non-GAAP financial measures to 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 would like to turn the call over to Alan

Thanks, Jackie, and good morning, everyone.

As you've seen in our earnings release earlier this morning, our team delivered solid results in the first quarter, and FY16 is off to a strong start. Overall in the quarter, organic revenues were up 9.5%, and adjusted earnings per share were up 1.8% versus prior year, despite significant currency headwinds.

As Brian will talk about in a few moments, there were three drivers of the organic revenue gains versus prior year. First: timing. Approximately $15 million of the outperformance related to a favorable year-over-year comparison due to a shift in the timing in holiday sales between September and December quarters over the last two years. We also saw earlier replenishment orders, as approximately $12 million of sales shifted into the first quarter from the second quarter.

Second: innovation. We continue to roll out EcoAdvanced in targeted markets around the globe. EcoAdvanced sales totaled $15 million in the quarter.

And third, organic sales were driven by distribution gains, price increases, and favorable mix impacts. We were able to execute effectively in both measured and non-measured channels during the holiday season.

In addition, favorable pricing and mix impacts were realized across many of our major markets. In total, price mix and distribution gains added approximately 1% to our first-quarter organic revenue growth.

Overall, we continue to see positive signs that the strategies and objectives that we have put in place since our spinoff are paying off. Our teams were able to increase distribution, and implement price increases in several markets, while continuing to closely manage costs.

Through our important holiday selling season, we continued to see positive signs in the battery category. Global category value outperformed volume performance as we saw a continued mix shift from the price segment to the premium, performance and specialty segments of the category, and a reduction in the frequency and depth of promotional activity.

Overall, total global category volumes were down 0.3%, and value was nearly flat in our latest 12-weeks data. In our largest market, the US, total category value was down [0.09%], and volumes were down 3.6% during the holiday season, reflecting a decrease in promotional volume, as the category laps elevated prior-year deep discounted activities that were not repeated this year.

As an Organization, we continue to focus on our three core strategic priorities: leading with innovation, operating with excellence, and driving productivity gains. And these have not changed since what we announced on Investor Day.

Energizer continues to bring new innovation and marketing news to the category. We continue to roll out EcoAdvanced, the world's first battery made with 4% recycled batteries in our priority markets.

EcoAdvanced allows us to capitalize on the growth within the performance segment of the category, by driving trade up. During the quarter, we also launched an upgrade to our flagship Energizer MAX brand, now our best ever performing MAX product, and we plan to continue to launch innovation in other areas of our portfolio throughout the remainder of the year.

We also remain focused on operating with excellence, and our strong first-quarter results demonstrated our ability to do so. Our teams delivered strong operating performance, driven by a high level of execution, as we were able to offset the impact of currencies, our go-to-market changes, and prior-year temporary shelf gains that were not repeated. In addition, we implemented price increases in several markets to partially offset the impact of the strong US dollar.

And finally, we continue to drive productivity through the Organization. We have worked very hard over the last two years, and through the spin, to embed a cost-conscious culture in our Organization. Most recently, we implemented zero-base budgeting efforts, and as a result have seen improvement in our SG&A levels. We continue to make strong progress as we move forward with our productivity initiatives on both trade investment and integrated supply chain optimization, as well as working capital improvement and procurement savings.

And now, I'll turn the call over to Brian for a more in-depth financial review of the quarter and an update to the outlook for FY16. Brian?

Thanks, Alan, and good morning, everyone. I'll begin by discussing the financial overview of the quarter, and then provide an update to our full-year outlook.

As Alan mentioned, we had a strong start to our fiscal year. Sales, gross margin and earnings all performed well, despite significant currency headwinds.

As we discussed on our November call, we expected favorable comparisons this quarter due to a shift in timing of holiday orders from the fourth quarter to the first quarter. Not only did this occur, but we also experienced earlier-than-expected replenishment orders.

In total, net sales increased 1%. Breaking that down, organic net sales increased more than 9%, due to the favorable timing of volume shifts, hurricane response sales, incremental innovation, increased distribution, pricing gains, and a favorable mix shift to premium, performance and specialty segments. Foreign currency headwinds impacted our top line by approximately $33 million, resulting in nearly a 7% decline.

The impact of our go-to-market changes, including the exit and shift to distributors in certain markets, resulted in a 1% decline in net sales. However, it's important to highlight that the net impact of the go-to-market changes generated a positive impact on operating profit. And Venezuela deconsolidation reduced sales by approximately $3 million, or less than 1%.

Looking at our organic sales performance across the four segments, North America organic sales increased $32 million or 12.5%, driven primarily due to favorable volumes, due to the shift in timing of holiday shipments, earlier-than-expected replenishment orders at the end of the quarter, and hurricane response sales. In addition, we realized improvements from increased year-over-year EcoAdvanced shipments, and we continue to perform well in both measured and non-measured channels.

These gains were partially offset by the previously mentioned prior-year promotional activities that were not repeated in the current year. We have now fully lapped these activities, which impacted our fourth-quarter 2015 and first-quarter 2016 comparatives.

Our Europe, Middle East and Africa organic sales increased $10 million or 8%, due to distribution gains, price increases, and timing of distributor orders. We continue to gain share in targeted European markets, and EcoAdvanced continues to perform well in certain European markets where consumers are more environmentally focused, which plays into their purchase decision.

Latin America organic sales were up nearly $5 million or 12%, driven by pricing actions across multiple markets, timing of shipments in distributor markets, and strong sales in Argentina due to pricing gains and increased inventory availability. As you are aware, the Argentine peso experienced a significant devaluation in mid-December. At current rates, the impact is projected to generate an additional $11 million of foreign currency headwind for the full fiscal year at the net sales line, and $8 million in segment profit. We have already taken actions to increase pricing to partially offset the full-year impact.

In Asia-Pacific, organic sales were up $1.4 million or nearly 2%, due primarily due to increased volumes. However, we expect the competitive environment across Asia, and particularly in Australia, to remain fierce through the balance of the year due to increased private label activity driven by certain discount retailers.

Now, on to gross margin -- the gross margin rate for the quarter was 45.3%, or 130 basis points below prior year. The decline was primarily driven by unfavorable currencies, as most of our raw materials are denominated in US dollars, which unfavorably impacts the gross margin rate as foreign currencies weaken.

Excluding the impact of currencies, go-to-market changes, and Venezuela, our gross margin rate increased 190 basis points. This improvement was primarily due to lower commodity costs, and a favorable product mix, as higher-margin premium, performance and specialty product shipments increased. These favorable items were partially offset by higher costs related to investment behind product performance improvements.

A&P spending was below prior year by $4 million or 100 basis points on a percent of sales basis, with nearly $2 million due to the impact of currencies. The operational decrease in the current quarter is primarily related to the lapping of increased A&P support ahead of the EcoAdvanced launch in the prior year, and reduced spending associated with our international go-to-market changes.

SG&A as a percent of sales, excluding unusuals, decreased 230 basis points due to timing of certain expenditures, the benefit of our zero-based budgeting efforts, and leverage from higher sales in the quarter. EPS on an ex-unusual basis was $1.16, or 1.8% above prior year, which included a $0.33 negative impact from unfavorable currencies.

Spin- and restructuring-related charges in the first quarter were $10 million, of which $6 million was recorded within SG&A and $1 million was recorded within cost of goods sold. We expect to incur up to $15 million of final charges for the full FY16.

Moving to the balance sheet, we ended the quarter with $556 million in cash, an increase of $54 million versus the end of FY15. Approximately 87% of our cash is held offshore.

We generated $88 million of free cash flow in the quarter, driven in part by improvements in days in inventory. Days in inventory is a targeted initiative of ours, and we made good progress this quarter.

Our debt level is approximately $1 billion, which equates to 2.8 times debt to EBITDA. In addition to paying our quarterly dividend, we also repurchased 600,000 shares of stock, approximately 1% of total outstanding shares.

Now turning to our full-year outlook -- as Alan stated earlier, we're off to a strong start to the fiscal year. As a result, we have identified several investment opportunities in the back half of the year which will likely result in increased cost in FY16, but which we believe will benefit the long-term outlook for our Business.

I'll touch on a few key 2016 financial metrics in our full-year outlook. First: net sales. Total net sales are now expected to be down low- to mid-single digits, an improvement versus our prior outlook of down mid-single digits, as organic sales are now expected to be flat to up low-single digits, reflecting the positive performance in the first quarter, while accounting for the timing impacts, as some sales were shifted from the second quarter into the first quarter due to holiday replenishment orders received earlier than normal.

Unfavorable foreign currencies are expected to reduce net sales by $65 million to $75 million, or 4% to 5%. This is an increase versus our previous outlook, due primarily to the impact of the Argentina devaluation, and further weakening of the Canadian dollar, the pound, and the Russian ruble. International go-to-market changes are expected to reduce net sales in the low-single digits, consistent with our previous outlook, and change in Venezuela results due to the previously announced deconsolidation will reduce net sales by $8.5 million or 0.5% for the full year.

Next, gross margin rates are expected to decline by up to 250 basis points, as favorable commodity costs and improved product mix are more than offset by unfavorable currency, international go-to-market changes, and the impact from the Venezuela deconsolidation and higher product cost related to product improvements. This is an improvement versus our previous outlook, reflecting increase to favorability in commodities and purchase product costs.

We are still expecting full-year SG&A as a percent of sales to be in the low 20%s. First-quarter SG&A, excluding spin and restructuring charges, was 15.3% on a percent of sales basis, due in large part to the benefit of improved top-line performance and timing of certain expenditures. Pre-tax income is expected to be negatively impacted by the movement in foreign currencies of $55 million to $65 million, net of hedge impact, slightly more unfavorable than our prior outlook.

Our income tax rate is expected to be in the range of 30% to 31%. This is consistent with our previous outlook.

Adjusted EPS outlook remains unchanged at $1.90 to $2.10. However, we are now projecting the high end of that range, as we expect a portion of the quarter-one favorability to flow through to the full year, partially offset by the previously mentioned increased investment spending and additional currency headwinds.

EBITDA is also expected to be at the upper end of the previously provided $275 million to $295 million range. Free cash flow is now expected to exceed $150 million. CapEx is still expected to be in the range of $35 million to $45 million.

It's important to note that our updated outlook is based upon current currency rates and trends within our competitive environment. In the event either materially change, we may need to update our outlook accordingly.

Before I turn the call back over to Alan for closing remarks, I want to review the quarterly flow for the remainder of the year versus FY15. These are largely the same as they were last quarter, but I thought it would be helpful to remind investors of these items as we move through the year.

In the second quarter, there will be a challenging prior-year comparison, as last year organic sales were up due to the launch of EcoAdvanced in the US. In addition, approximately $12 million of replenishment orders this year shifted from the March quarter to the December quarter, and will likely impact results over the next two quarters.

Also, based upon current currency rates, we expect a continuation of significant currency headwinds on a year-over-year basis. We'll continue to experience the impact of the go-to-market changes. And finally, this will be the last quarter we experience the effects from the Venezuela deconsolidation.

In the third quarter of FY15, organic sales were nearly flat. In addition, we will begin to fully lap the impact from the go-to-market changes.

In total, we expect this to be the quarter where many transitional items will begin to moderate, and the year-over-year organic revenue comparisons become more meaningful. However, we will continue to experience foreign currency headwinds, and year-over-year comparability issues within SG&A and other financing, as prior-year amounts are based upon carve-out accounting and not necessarily representative of our stand-alone cost structure. As a result, we expect a significant unfavorable comparison within SG&A and other financing versus the prior fiscal year.

Finally, although the fourth quarter of FY15 organic sales were down 8%, we do not believe that we will have a material impact from a year-over-year comparison standpoint, as the decline was the result of certain FY14 promotional activities that were not repeated. As such, the year-over-year organic revenue comparison in the quarter will be more normalized. This will also be the first quarter in which our prior-year SG&A interest expense and other financing comparisons are based upon our stand-alone results.

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

Thanks, Brian.

To reiterate, FY16 is off to a strong start, and the Organization is focused on executing our strategies and delivering top-tier free cash flow performance. The underlying fundamentals of our Business continue to improve, and we have a strong foundation to drive long-term shareholder value. As we have said before, our goal of delivering long-term shareholder value isn't comprised of an either/or approach in regard to our strategic priorities, but a combination of reinvesting in our Business, returning cash to shareholders, and adding value to our portfolio through acquisitions.

During the quarter, we continued to invest in our Business with innovation and productivity improvement initiatives. We also returned cash to shareholders through our quarterly dividend of $15 million, and share repurchases of $21 million or 600,000 shares. We also continue to look for M&A opportunities very aggressively. We will continue to balance these three drivers in order to maximize long-term shareholder value.

This completes our prepared remarks, and at this point we will be happy to take your questions. Back to you, operator.

(Operator Instructions)

Bill Chappell, SunTrust.

Thanks. Good morning.

Good morning, Bill.

Good morning. Could you just talk a little bit more about -- I'm just trying to understand, especially in North America, kind of what organic growth would have been excluding the kind of pull forward, push back? And also maybe a little more color on the early replenishments. I'm just trying to understand that seemed to happen both in the US and around the world; why would that be happening? Is it just faster sell through, or is it more of inventory management from the retailers?

Yes. Bill, it's Alan. Let me take the second question first, and I'll ask Brian to address the first one.

So as you think about the pull forward from Q2 to Q1, it was really January into December. As we went into our planning with our customers this year, not only is there a balance between trying to make sure you've got the right level of inventories in the store and the back room and in the DCs, it's also making sure that we put in place the proper inventory in-store to mitigate any potential out of stock situation that might occur. This was really important for our retail partners this year to make sure that the pegs were full and that we didn't generate any lost sales.

So this year was probably a much more balanced approach to making sure there was sufficient inventory on the floor. We did see because of the softer comp we had in Q1, strong sales and as a result, you saw early replenishment flow-through from January into December. And I'll turn it over to Brian on the second in terms of organic sales.

Bill, obviously there's a lot of moving parts within the quarter and even over the balance of the year it is going to be a bit choppy. The way to think of our organic sales for -- globally, a 9.5% organic sales increase. About 3% was driven by timing, those sales shifting from quarter for into quarter one. We knew there was going to be a soft prior-year comparison, we would get that benefit.

About 3% was EcoAdvanced sales. Innovation, which we launched in the second quarter so we had a favorable year-over-year comp there. We had the 2% driven by the Q2 sales, the early replenishment shifting into Q1. And the final piece is a 1% of distribution and pricing gains. So as we entered into the quarter we knew that we had a strong lap because there were certain promotional activities that we decided not -- to not repeat. We talked about that over the last couple of calls.

We knew that was going to be a headwind. We are able to gain additional distribution to offset that impact, and then we saw pricing and favorable mix flow through. And so the combination of the net of the distribution gains plus positive pricing and mix generated the 1% organic growth, and that's really the underlying driver of the business that we -- that's included in our full-year guidance as well.

Okay. That's very helpful. And just quickly on share repurchase, I understand you did some in the quarter, but it's still been relatively small since you've been a standalone company. Was that in part because you were blacked out, there were only so many days, or is -- you really trying to just hold that for a couple quarters to see what other options there are out there?

Yes. So, Bill, Alan. During the quarter we repurchased 600,000 shares so we have 6.9 million shares left in our authorization. The total we spent on the repurchase was roughly $21.8 million at an average price of $36.25 per share. We intend to continue to fully put our capital to work, but as I've indicated consistently since Investor Day, we really want to make sure we strike the right balance. Again first priority for us is reinvesting in the business, and we're starting to see that show as you can see in our results.

Second, we will continue to pay a meaningful dividend as part of that balance. And after that, we're going to opportunistically repurchase shares and pursue selective and disciplined M&A. I think the headline I'd give you is keep in mind these aren't mutually exclusive. Rather we feel that the strategy that we have is really about leveraging all of these alternatives to create what we believe will generate the best long-term value for our shareholders.

So overarching strategy has not changed. And maybe I'll let Brian expand a little bit in terms of go forward.

I think it summarizes it well. It's really trying to strike that balanced approach and looking at short, mid and long-term cash needs and opportunities, and ultimately it's going to depend upon what we believe will generate the best long-term value for shareholders.

Great. I'll turn it over. Thanks so much.

Thanks, Bill.

Bill Schmitz, Deutsche Bank.

Hi. Good morning.

Good morning.

Hey, is there any way to sort of segregate how much of the margin upside was driven by the pull forward from the fourth quarter and the pull in from the second quarter?

In dollar terms?

Yes.

In Alan's prepared remarks about $15 million of sales were shifted from Q4 to Q1. About $12 million of sales were shifted from Q2 into Q1. You can apply our overall gross margin rate, 45.3%, and get pretty close.

Got you, but won't there be a ton of incremental margin because you've already absorbed the overhead from those sales? Do you know what I mean? Because the SG&A rate was way lower than we thought it was going to be.

I'm sorry, Bill. I thought you were talking about gross margin.

No, I'm talking just about just like the EBIT impact.

Yes. So most of our SG&A cost structure -- a portion of it's variable, but a large portion of it is fixed compensation related items, and so a lot of that gross margin flow-through would flow-through to the bottom line as well. There are some variable components, but a lot of the gross margin would flow-through to EBIT.

Okay, got you. And then it looks like in some of the scanned data, and I know it's not very exhaustive at all, but it seems like the category is massively inflecting as are your sales, so I'm curious what's going on in terms of sell through. Because the year-over-year comparison wasn't anything to speak of either up or down, so I'm just curious why the category's gotten so strong recently. And then maybe some commentary on Europe, because you guys had some great results in the year ago at least in some of the syndicated stuff, and now it seems like shares are declining a little bit, and the sales are down.

Yes. So on -- let me kind of give you a walk through on the category, Bill, and this may address some of the other questions that come up. So overall the category continues to show signs of stabilizing. As you think about category value trends during the latest 12 weeks, they were actually consistent with the 52-week trends.

Value also continues to outpace volume globally and in the US, so as you look at the latest 12 week data for total battery category globally, volume was down 0.3%, value was up 0.1%. In the US it's a little bit different with volume down 3.7% and value down 0.9%. A couple things to call out there as you look at developed markets, we see those continue to show signs of stabilizing during the latest 12 weeks. They are basically down about 0.1%, but developing markets continue to grow. They were up 1.3% on a value basis during the latest 12 weeks.

I think the headline to kind of take into consideration that each market is very different. So let me kind of give you the headlines out of each of the four areas in the world where we compete. North America is very focused on value maximization, bringing innovation to the category and driving trade up. We are seeing that in other markets as well, but there are more prevalent trends that seem to be occurring. In Asia, it's really about competition, the environment right now is very fierce and I'll take Australia as an example. You are seeing the entrance of extreme value retailers, that have strong private label programs, and that's competing -- creating a lot of competitive activity there. LatAm, it's really about the fact that there's a lot of hyper inflationary markets.

And in the Europe Middle East and Africa -- to answer the latter part of the question, a lot of that in Europe in particular is a result of the fact that private label has very high penetration that the branded manufacturers have to compete with. When you look at the value share within Europe, it sits right at around 25%. And that compares to 12% in the US, mid-single digits in Asia and low single digits in Latin America. We did see some growth in Germany and Spain in particular on a unit basis. In Europe however AUPs were actually down almost 4.9% and overall, as a result, we did see private label value decline during the quarter 1.2%.

So I think all in, as we look at the category, it's really different market-to-market. But if you take the largest battery market which is the US, it's where we are seeing the biggest improvement in the trends and again the 12 week being consistent with the 52, as there is a shift from what you would consider to be price segments to premium, performance and the specialty segments. And as a result of that, you're seeing higher valuation in the category and that's flowing through.

The second thing is the big trend driver there is innovation. So within the performance alkaline segment you've seen all three manufacturers bring innovation, as an example Energizer's EcoAdvanced performance alkaline. And that's enabled us to drive trade up both within the category and then from the price and premium segments into the performance segment. And then, lastly, in particular in the US, you are seeing a decrease in promotional activity in both frequency and the depth of promotions so the overall category dollars sold on promotion is down versus the prior year.

So all in, we remain successful as a result of the fact that we've been able to gain profitable share, and we've done that by staying squarely focused on the three strategic priorities that we've shared with the community starting on Investor Day, which was leading with innovation, driving productivity gains and operating with excellence. And I wouldn't discount the importance of the last one. We have spent a significant amount of time and energy to ensure that we win at retail by focusing on very effective category fundamentals which have helped us in our overall base share. So that's a snapshot of what's going on in the category both globally and more particularly the US.

Steve Powers, UBS.

Great. Thank you. Maybe just to start a follow-up on repurchases, and I apologize in advance, there's a good deal of numbers in this question. But I'm just looking to frame your capacity for more buybacks going forward without adding leverage or having to repatriate overseas cash, and it sounds like you have about $70 million, $75 million in US cash today plus an incremental $60 million or so in free cash flow still to come beyond the strong Q1 performance which I assume a good deal in the US. But a lot of that looks like it's just going to be earmarked for the dividend. So if I do the math is $70 million a good round number to use in terms of excess US-based cash that you may be able to deploy before borrowing or repatriation?

Yes. Our US cash balance at the end of the quarter was $70 million. You're right. The dividend, which is funded out of the US, will be $15 million roughly per quarter at our current dividend rate. And then, generating for the balance of the year, free cash flow generation, in total we're projecting to exceed $150 million of free cash flow generated for the full year. Roughly about half of that is generated in the US, the other half is abroad. And we'll always look for tax efficient ways to bring international cash back to the US.

Okay. Thank you. That's confirming. And then I guess, is -- stepping back, looking, thinking about your M&A aspirations in the context of market volatility, I'm just curious to see to have your thoughts on how that volatility impacts potential timing of M&A from your perspective. Do you see the volatility more as an opportunity especially in light of the strong performances so far this year? Or does it make you more cautious and actually raise the bar on you're saying yes to a deal near-term?

Yes. Is a great question. I think for us as we've said from the beginning we're going to be very selective and disciplined in our approach to M&A. And keep in mind, again, I want to reiterate it's really about striking a balance between reinvesting in the business, providing return of capital to shareholders and M&A.

And if you think about it, since the spin we've either executed against or analyzed all three of these. So let me give you a little bit of background. We've reinvested in our business in initiatives that improve our cost, performance of our products and efficiency. And the example would be installing SAP in Europe, investing in our product improvements, or our revenue management initiatives which we can talk about a little bit later in the call.

We've also provided a meaningful and competitive dividend and recently purchased -- repurchased 600,000 shares. And on the M&A front, we have been very aggressive in evaluating M&A opportunities. We will continue to do so. Again, by being disciplined, we are making sure that we continue to use an approach that's very selective, very disciplined, and what we believe will allow us to generate long-term shareholder value. And again as we have talked about earlier, this is really about leveraging our global footprint, the broad channel span that we have, making sure that whatever we look at financially has stable margins, strong cash flows, and reasonable growth, our ability to be able to take the category and expand it further. And then finally, we want to make sure that whatever we look at we can operationalize across our business. And these are just to name a few.

So the management team has really been and will continue to be proactive in analyzing the best ways to put our capital to use. M&A will continue to be one of those. I will tell you for the things that we have looked at so far, candidly, they're either not been a fit or the financial or business characteristics weren't in line with our expectations and the criteria that we've said and as a result chose not to pursue them any further. But we will continue to look at assets that become available based on the criteria we've set to determine whether or not they're going to add that long-term shareholder value. Brian, anything you want to add?

Just to build on a couple of points, obviously over the last 30 to 60 days there was some volatility within the debt markets. We're mindful of that. And the cost of capital has increased a bit from what we saw earlier in the year into the summer and into the fall, and so we take all of those factors into account.

And just to reiterate a point that Alan made, we're not going to do M&A for M&A sake; however, we do have a global footprint and distribution in multiple channels, and as a result we think that we owe it to our shareholders to continue to look at opportunities as they arrive and striking that right balance we've talked about several times.

William Reuter, Bank of America.

This is [Jenna Nyong] for Bill today. Thanks for taking my questions. So you mentioned that there is a favorable product mix shift to premium, performance and specialty products. What do you think is driving this shift?

Yes. So hi. It's Alan. So a couple things, again a little background for you. The premium segment and the category is relatively flat. It is up 0.1%. The performance segment is up 2.2%, and the price segment is actually declining 2.7%. This is on a latest 12 week value basis, and again these trends are very consistent with what we've seen on a 52-week basis. So there's a couple things that have occurred within the category.

That shift is being driven primarily as a result of if you take the top three manufacturers in the category, all have introduced innovation to the category, to add value to the category. And as result of that, you're seeing trade up which is a key component to driving value occur within the category again shifting from price to premium and then premium into performance.

The second thing is you are seeing pretty good growth in what we consider to be or what we call the specialty segment. The specialty segment really consists of electronic batteries and hearing aid batteries and photo batteries. And most of the growth in that particular fast growth segment's really coming from both the electronic and the hearing aid sub segments. It's a fast-growing segment. As a matter fact it's up 4.8% in volume and 3.8% in value during the latest 12 weeks. It's a very profitable segment to the retailers so they get behind this both from a merchandising and a listing standpoint. And for Energizer in particular it's helpful because we have a 45 share in that particular segment and we're up 1.8 points. So that is the second factor that we're seeing within the mix shift that's occurred.

The other is, candidly, our estimation when we had talked about the category being in low single-digit decline over time, our forecast for the price segment was to decline probably at more moderate rates than what we're seeing. We're actually seeing the price segment declined much faster than what we had modeled. So those three things are really driving the mix shift that you're seeing occur in the category. Now, keep in mind it's different market to market, area to area but in general those are the trends that are pretty consistent around the globe.

Great. Thank you. And then on the incremental gains from EcoAdvanced you mentioned have they come from your existing products, or do you think you've gained more shelf space with that?

Yes. So a couple things. The headlines I'd give you on EcoAdvanced is we continue to be really pleased with the launch. We are meeting all of our ACV distribution and display share goals at this point in the launch so we're pleased with that. We're certainly seeing share grow, so the value share sits around 1% in the US, 1.5% overall. When you look at some Western European markets, where consumers have a higher environmental focus, our shares are actually high single digit approaching low double-digit shares, so this is in line with our share expectations of 2% to 15% depending on the market over time.

We've launched -- since launch, rather we've shipped roughly $56 million in sales, and we expect that to continue as trial accelerates post holiday. We've launched in all of our major markets. We are now launching in secondary markets. Inventory levels are a little high again because of the off shelf display locations that we've been driving requires more inventory, and that's where you've seen us pick up space beyond the main home location. We're very pleased with both the trial and repeat purchase rates, so trial right now for us is at a level similar to other competitive launches in this space. And our repeat purchase rates are actually higher than what we've seen from competitive launches so all in we're very pleased with that.

As you think about where the volume is coming from, we're sourcing a majority of the volume from competitive products, so cannibalization at this point is very minimal. And we're very pleased that the copy that we've been running is very effective, so we've seen improvements in our brand equity measures as a result both of the media wave we've put behind the launch and the effectiveness of the copy.

Kevin Grundy, Jefferies.

Thanks, guys. Good morning.

Good morning.

So my first question, Alan, I just want to come back. You've provided a lot of helpful detail on the call, but going back to your longer-term algorithm of the low single-digit declines that you expect in the category, I just want to make sure that I'm not sort of mis-characterizing some of the commentary today. That's still your outlook despite some of the encouraging data that we've seen in Nielsen.

A lot of the commentary today seems to be more the opportunity with respect to innovation and mix. Is that sort of a fair characterization -- there's not necessarily move away internally on the Company's part from the low single-digit declines expected from a volume perspective globally?

Yes, Kevin, I think that's an accurate statement. Our Outlook continues to be that the category will be down low single digits over time, and let me give you a little background on why. We don't really anticipate given the research that we do that there'll be any device or demographic trends that would make us think any differently about that projection. Although some mix shifts have occurred, as an example within the price segment, declining faster than our Outlook, we're still pretty much holding true to that.

Now, I think what you'll find is we're going to stay true to the core strategies we put in place to continue to bring value to the category given that current projection. And we believe we can do that through both innovation and really driving trade up within the category to higher priced alternatives, given that consumers have a need and a desire for those types of products. So we're going to continue down that path. That is working well for us.

I see. Alan, can you put some numbers on that in terms of the portion of the category that is premium now that you think you can sort of premiumize over a period of time and drive consumer trade up? Can you put some numbers on that in terms of helping us understand where you think the opportunity is over time?

Yes. That's a great question. I prefer candidly not to speculate on what that would be. What I can tell you is almost two-thirds of all the category sales were in the premium and performance segment and given what we're seeing over the latest 52 weeks in terms of a shift from the price segment to premium and performance, you can probably do some rough math on your own to come up with a pretty good estimate, but we are confident that the plans we have in place will be able to continue to drive those trends.

Okay.

And I just want to reiterate, by maintaining our long-term Outlook of low single digit decline in the category, it really speaks to our emphasis and continued focus on cost reduction and driving productivity improvements. That hasn't changed. In order for us to win and grow that low single-digit EBITDA that we've communicated previously, we have to continue to find ways to take costs out of the business and continue to operate more effectively, and so that focus has not changed one bit.

Carla Casella, JPMorgan.

Hi. You talked about inventory. Can you say -- and you see the inventory days coming down. Do you have a specific target or amount you expect to reduce inventory for the year?

Yes. As we executed our 2013 restructuring project internally we called project transformers, we made several significant changes to our manufacturing footprint. We reduced our number of manufacturing facilities from 14 down to 7. As a result, we made a conscious decision to not target days in inventory. We knew that as our global supply chain adjusted there would be an uptick in days in inventory, and we saw that.

However, days in inventory since we're post the restructuring of our manufacturing footprint, our supply chain has stabilized and as a result, improving days in inventory is definitely a target and a focus for us. We went from 113 days of inventory as we ended the year at the September quarter and we improved it 6 days ending the 12/31 quarter to 107 days of inventory.

We will continue to make progress on that. We have not discussed externally a specific target around days in inventory, but it is a key driver that is going to allow us to continue to grow free cash flow on a year-over-year basis.

Okay. Great. And then you mentioned on the M&A front you are continuing to look for opportunities. How comfortable are you with leverage? How far up would you take the leverage for the right M&A opportunity?

It really depends. And we haven't speculated as to how high we would be willing to go. It would depend upon the deal, the amount of synergies we can get, the cash flow that would generate from the business, so it's all deal dependent.

Okay. Great. That's all I had.

Thank you, Carla.

I'm showing no additional questions. I'd like to turn the conference call back over to the speakers for any closing remarks.

Yes. So again, I want to thank everyone for joining us on the call today. Obviously, a very positive quarter. As Brian alluded to in our prepared remarks and in the Q&A, we do have some tough comps in Q2. And we feel we've got very strong plans to continue to drive continued value in the category.

And I just want to reiterate, because we've been very consistent from Investor Day, we will squarely remain focused on our three strategic priorities of leading with innovation, driving productivity gains and operating with excellence. We believe that in doing so, it positions us well to win in the category regardless of the scenario we face. So we're getting traction behind that. We will continue to remain focused on that. And again we appreciate everyone's time today in joining us on the call. Thank you. Operator?

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.