Energizer Holdings Inc (ENR) 2016 Q2 法說會逐字稿

Good morning. My name is Rocco, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's second-quarter FY16 conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference call over to Jackie Burwitz, Vice President, Investor Relations. You may begin your conference.

Good morning and thank you for joining us. During the call, we will discuss our fiscal second-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 be via our website, energizerholdings.com.

During the call, we may make statements about our expectation for future plans and financial and operating performance. Any such statements are forward-looking statements which reflect our current views with respect to future events.

We 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 our Investor Relations section of our website, energizerholdings.com.

Information concerning our category or market share discussed on this call relate to markets where we compete, and are based on estimates using Energizer's internal data. Data from industry analysis and adjustments that we believe to be reasonable.

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

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

Thanks, Jackie, and good morning, everyone. We are pleased with our ability to achieve the solid results in the second quarter, adding to our momentum from the start of the year.

Overall in the quarter, organic revenues were up 0.5% as distribution gains in the US and Europe, Middle East and Africa were able to offset the prior-year EcoAdvanced launch activity. Due to heavy shipments in the first quarter, we estimated that retail inventories were above historical norms and expected to be low in the second quarter.

However, this did not occur to the extent we anticipated. We do still expect retail inventories to return to a more normalized level over the next two quarters, which will likely impact our year-over-year revenue comparison for the balance of the year.

Looking at the latest 12-week global battery category data in the measured markets in which we compete, overall volume in value were flat to slightly positive. In our largest market, the US, total category value for the latest 12 weeks through March 19 was up 1.9% and volumes up 1.5%, reflecting the benefit of winter storms that occurred during the period. During the quarter, promotional levels were consistent with the prior year, and for the latest 52 weeks, promotional depth and frequency have declined.

Now turning to our three strategic priorities, leading with innovation, operating with excellence and driving productivity gains. First, we continue to bring marketing news and innovation to our consumers and retail partners. Over the last two quarters, we have introduced innovation across most of our portfolio.

We have improved the performance of Energizer Max AA, which is now even longer lasting and have rolled it out across the US. We have improved the performance of our Energizer Ultimate Lithium, AA which is the world's longest lasting battery in all devices.

In addition, it is the number one brand of rechargeable round cell batteries globally. Energizer introduced rechargeable batteries made with 4% recycled material. And finally, we've launched two new hard case professional portable lights, which are designed to meet the needs of home improvement and professional users.

We believe our commitment to leading with innovation will continue to drive value for our categories, consumers and our retail Partners. We also remain focused on operating with excellence, by driving effective category fundamentals and our strong second-quarter results demonstrated our ability to do so. We have continued to increase prices in certain International markets to partially offset the unfavorable impact of currencies.

In US and across many of our key International markets, we gained new distribution and incremental shelf space. Energizer brand equity has grown behind increased distribution, strong in-store execution and investments in advertising.

And finally, we continued to drive productivity gains and are making good progress on our cost savings, working capital and free cash flow initiatives. Working capital trended positive due to improvements in days and inventory.

In addition, we made investments behind future productivity improvements, including trade spending and integrated supply chain optimization. We believe these investments and initiatives will help us continue to build momentum throughout the organization, as well as to drive future cost savings and enhanced returns.

We've had a strong start to our first full fiscal year as a standalone Company. Through the hard work of our teams around the world, we have delivered solid operating results.

Looking forward, we expect to benefit from improvements in foreign currencies and a more favorable effective tax rate. As a result, we are raising our full-year outlook for adjusted earnings per share in the range of $2.15 to $2.25.

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 for our full-year outlook.

As Alan mentioned, we continued our strong start to the fiscal year. Organic sales in the quarter were better than expected. We saw improvements in foreign currency rates near the end of the quarter, and have a more favorable outlook for our effective tax rate. I'll touch on each of these items in more detail.

First, net sales. Total net sales decreased approximately 6%. Driven by the following: organic net sales increased slightly, up 0.5%, we had distribution gains of approximately 3%, and storm volumes and other items up 0.5% were partially offset by the prior-year launch of EcoAdvanced.

Total pricing and mix were nearly flat, as declines in Asia due to heightened competitive activity were offset by pricing and mix gains in rest of world. Foreign currency headwinds impacted our top line by approximately $16 million, resulting in a 4% decline.

Overall for the quarter, currencies were line with expectations, however, there was an improvement in rates near the end of the quarter. 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 highlight that the net impact of the go-to-market changes continues to generate a positive impact on operating profit. And Venezuela deconsolidation reduced sales by approximately $5 million or nearly 2%. This was the last quarter we'll experience a year-over-year impact from the deconsolidation, as we have now have fully lapped the change.

As Alan mentioned, following our first quarter, we estimated that retail inventories were above historical levels. And as a result, we anticipated that shipments would be reduced in the second quarter, however, this has not yet fully occurred. We still expect retail inventories to return to a more normalized level over the next two quarters, which will likely impact our year-over-year revenue comparisons by approximately $12 million over the balance of the year.

Looking at our organic sales performance across the four segments. North America organic sales were up slightly, as distribution and shelf space gains and increased storm volumes were able to offset the lap of the EcoAdvanced product launch in the prior-year's second quarter.

Our Europe, Middle East and Africa organic sales increased $3 million or 3%, due to distribution gains, the continued a launch of EcoAdvanced in additional markets and price increases in select markets. This marks the 6th consecutive quarter of organic net sales growth for our EMEA region despite challenging economic conditions.

Latin America organic sales were up nearly $4 million or 12%, driven by pricing actions across multiple markets, timing of shipments in distributor markets and new distribution gains. In Asia-Pacific, organic sales were down $5 million or nearly 7% due primarily to heightened competitive activity in select developed markets. As we stated last quarter, we expect the competitive environment in these markets to remain elevated 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 ex-unusuals for the quarter was 42.9% or 430 basis points below prior year. The decline was driven by 180 basis point impact from unfavorable currencies, a 30 basis point impact due to the deconsolidation of Venezuela, and an approximately 220 basis point impact from higher costs related to investments and product improvements and productivity initiatives, partially offset by favorable commodity and other costs.

A&P spending was below prior year by $11 million or 290 basis points on a percent-of-sales basis. The decrease in the current quarter is primarily related to the lapping of increased A&P support of the EcoAdvanced launch in the prior year, and the timing of current year advertising and promotional activities. SG&A as a percent of sales, excluding unusuals, increased 180 basis points due to the lower net sales, timing of certain expenditures and investment spending.

Our tax rate on a year-to-date basis was 29.1%, which was slightly favorable to our previous outlook due primarily to the favorable impacts from the country mix of earnings. We now expect our full-year tax rate will be in the range of 29% to 30% for the full year.

Spin and restructuring related charges in the second quarter were $3.4 million, of which $2.2 million was reported within SG&A and $1.7 million was reported within cost of goods sold. We have incurred $13.6 million of spin and restructuring related charges on year-to-date basis, and expect to incur an additional $5 million over the remainder of the fiscal year.

Moving into the balance sheet. We ended the quarter with $576 million in cash, with greater than 90% of our cash held offshore. On a year-to-date basis, we generated $115 million of free cash flow, driven in part by improvements in days in inventory.

In addition, we have paid a total of $31 million in dividends, and repurchased 600,000 shares through the first six months of the year. Our debt level is approximately $1 billion, which equates to a 3 times debt to EBITDA on a trailing 12-month basis.

Now turning to our full-year outlook. As Alan stated earlier, we are increasing our full-year FY16 outlook for adjusted earnings per share in the range of $2.15 to $2.25. Due to the strong performance in the first half of year, improved foreign currency rates, and a more favorable estimate of our effective tax rate.

I'll touch on a few key 2016 financial metrics in our full-year outlook. First, total net sales are expected to be down low single digits due to the following: organic net sales are expected to be up low single digits, reflecting the positive performance and distribution gains achieved in the first half of the fiscal year, partially offset by retail inventory de-loads that we expect to occur over the remainder of the year.

Unfavorable foreign currencies are now expected to reduce net sales by $60 million to $70 million or 4% to 5%. This is an improvement versus our previous outlook based upon current currency rates.

International go-to-market changes are expected to reduce net sales in the low single digits, consistent with our previous outlook. And change in the Venezuela results due to the previously announced deconsolidation, will reduce net sales by $8.5 million or 0.5%.

The impact from the deconsolidation was fully recognized in the first half of 2016. We have now fully lapped the impact from the prior-year's deconsolidation.

Next, gross margin rates are expected to decline by up to 250 basis points, consistent with our previous outlook. As approximately $15 million to $20 million of favorable commodity and other product costs are expected to be offset by unfavorable currency, international go-to-market changes, the impact from the Venezuela deconsolidation, investment spending, and higher product costs related to product improvements and productivity initiatives.

We are still expecting full-year SG&A, excluding spin and restructuring charges, as a percent of sales to be in the low [$20 million]s. SG&A, excluding spin and restructuring charges, was 18.9% on a percent of sales basis through the first six months of the year. However, lower net sales in the back half of the year due to the seasonal nature of our business and incremental investment spending is expected to increase the rate in the final two quarters of the year.

Pre-tax income is expected to be negatively impacted by the movement in foreign currencies of $50 million to $60 million net of a hedge impact. This is slightly more favorable than our prior outlook. As I mentioned earlier, our full-year income tax rate is expected to be the range of 29% to 30%.

The outlook for adjusted EBITDA is also increasing to the range of $280 million to $300 million. Again, this is a reflection of our strong first-half performance and improvement in foreign currency rates.

CapEx is expected to be the range of $30 million to $35 million. Free cash flow is expected to exceed $150 million, consistent with our previous outlook.

It is important to note that our updated outlook is based upon current foreign 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 provide a quarterly flow for the remainder of the year versus FY15. These are largely the same as last quarter, but I thought it would be helpful to remind investors of these items that we have moved through the year.

In the third quarter of FY15, organic sales were nearly flat. In addition, we'll begin before 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.

However, we expect retail inventory levels to normalize over the final two quarters of the year, impacting our year-over-year comparisons. And foreign currency rates will remain a headwind for the balance of the year.

In addition, there are 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 standalone cost structure. As a result, we expect a significant unfavorable comparison within SG&A and other financing items versus the prior fiscal year.

Finally, although the fourth quarter of FY15 organic sales were down 8%, we do not believe it 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 our based upon our standalone results.

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

Thanks, Brian.

To reiterate, we are off to a strong start to FY16. The underlying fundamentals of our business remain solid, and we are building a foundation to drive long-term shareholder value and deliver top-tier free cash flow performance. Our goal of delivering long-term shareholder value will be achieved through a balanced combination of reinvesting in our business, returning cash to shareholders and adding to our portfolio through acquisitions.

During the quarter, we continued to invest in our business with innovation and productivity improvement initiatives. We've returned cash to shareholders through our quarterly dividend of $15 million, and have continued to evaluate M&A opportunities. We will continue to balance these three drivers in order to maximize long-term shareholder value.

This completes our prepared remarks, and now we will be happy to take your questions. Operator, I'll turn it back over to you.

(Operator Instructions)

Olivia Tong, Bank of America/Merrill Lynch.

Thanks, good morning. Some of the upside to sales, EBITDA and EPS that you saw in the quarter is flowing through to the full-year outlook, but you made no change to the free cash flow target. I know earnings are weighted to half, but historically, what's the rough breakout first half versus second half on free cash flow? Because with $115 million year to date, it looks like you are in a pretty comfortable position to exceed your outlook on free cash flow.

Yes, Olivia, this is Brian. We have maintained our guidance for the full-year outlook on free cash flow to exceed $150 million. The guidance does reflect improvements in foreign currency rates, the favorable tax rate, the updated forecast for CapEx, and then also additional in spin restructuring charges. However, as you know, there's many moving parts to free cash flow, including cash out laid as several accrued items.

And until we fully flush through some of the spin related accruals and restructuring related items, including certain carryover items from the spin. Such as a deferred comp balance that we've since frozen in this part of our project Transformers, simply put there's a lot of moving parts within free cash flow. And just some of the variability on the timing of these cash payments are incorporated within our outlook, and we intentionally left our free cash file outlook a bit more open ended than some of the other outlook items that we provided.

Got it. And then historically, can you give us sense of the breakout first half versus second half of just standalone businesses, excluding the one-timeish type spin related charges?

Yes. Obviously, the first half is stronger than the second half, but prior year because of the number of restructuring charges and the cash outlay related to those restructuring charges make if a bit difficult, but let us follow up with you as we dig into some more of the details.

Got it. And then just a follow up, some of the weather forecasters that we subscribe to are suggesting that this year is expected to be quite favorable from a hurricane perspective. So clearly, you cannot bank on that. But to what extent do you and your retailers try to factor that expectation into your sales and inventory planning?

Hello, Olivia, it is Alan. Here's the best way to think about it. When we look at the outlook for the category, we certainly take into consideration probably the larger trends from both a demographic and a device standpoint.

We certainly consider disasters in our planning, less from building it into the base plan and more from preparation with our major retailers in terms of readiness. So that means having product available on pallets in DCs ready to ship to be able to cover those needs as they occur. It is a proactive response program that we put in place many, many years ago, and we have certainly have benefited from that from being able to ship as retailers need that product to meet our consumer's needs in those markets that are affected.

Just to build that a little bit. Is when you look at our working capital, specifically days in inventory, you will see some fluctuations as we start to near the hurricane season. So our manufacturing plants and inventory levels will spike up so that we can respond accordingly.

Great, thanks. Just one last question on share repurchase and the allocation of cash. Obviously 600,000 shares, but still a lot left in the program. So how often do you revisit whether to reconsider the priorities for cash whether dividend share purchase? And then what does that imply about your outlook on M&A?

Yes, so, Olivia, Alan again. So a couple of things. We continuously evaluate the best opportunities to maximize shareholder value, certainly opportunistic share repurchase is one of those. We regularly review our recommendations with the Board, this isn't something that we put off until the opportunity occurs. We are very proactive in looking at what the opportunities are. The best way I would sum it up for you, because we may get the question a couple of times today. I'm going to revert back to what we talked about at Investor Day.

We really outlined three strategic priorities in terms of how we will use cash going forward. The first is certainly really reinvesting back into the business, which we've made a priority, and Brian alluded to in his prepared remarks. The second is providing that return of capital to shareholders. Again, we will do that by paying a meaningful and competitive dividend, which as you know we've done, and looking at opportunistic share repurchase.

Then finally, one of our priorities is to continue to look at acquiring earnings streams that we can bring into the fold. I can tell you that the organization, the management team, has been very aggressive and proactive in doing that and we continue to do that today. The way I would summarize it is, we see our ability to deliver the best long-term value for our shareholders by deleveraging and balancing all three of those alternatives, they are not an either/or. And we believe that taking that approach going forward, and again, focusing on the core business the way we are today is going to allow us to continue to generate the results that we are demonstrating so far.

Nik Modi, RBC Capital Markets.

Yes, thanks good morning, everyone. Just a the couple questions here. Brian, just from a cost structure standpoint when you think about the SG&A and I know it's very messy right now with the carve-out accounting.

But versus, let's say, six months ago, do you feel like the cost structure is as you expected it to be? And then as we think about the next couple of years, will you be able to provide us more clarity on quantifying productivity initiatives once you actually have a level SG&A base? And I just have one or two follow ups.

SG&A levels coming out of the spin are near where we are expected. Our strong start to the fiscal year has provided the opportunity to beef up some investments that we believe will benefit this year and also in years to come. As we are currently going through our long-range strategic planning process and then the coming months going through our annual business planning process, there is certain initiatives that we are focusing the organization on that will definitely drive future cost savings.

As part of our annual outlook and when we provide our earnings outlook for the coming year, we will give some more color as to what's expected from an SG&A, and then an overall productivity improvement. So more to come definitely on that.

But I do want to emphasize that productivity improvements and continuing to take costs out of the business, we don't view these as a big bang restructuring effort like we had with project Transformers. Our hope is that we create that cost cut mindset throughout the organization, and we continue to drive productivity gains. And it is going to be a key enabler for us to generate that year-over-year earnings growth.

Nik, it is Alan. The build I'd give you there too is, thing about this as continuous improvement initiatives within our business. It allows us to really time things well, build them into the way we want to operate as an organization, but we're really thinking about this as continued continuous improvement.

Great. And then, Alan, just was wondering if you can give us a state of the union on your time at the National Association of Chain Drugstores? Any feedback from customers, what's the big focus right now? Any thoughts around that would be helpful.

Yes, it is great question, Nik. We attend an NACDS as a Company every year, and we have structured meetings with those customers to go through upcoming joint business plan, development, strategic opportunities, and state of the category in the business. Those meetings cycle through a number of meetings throughout the course of the three or four days. Our team does a terrific job of encapturing both what's on the retailer's mind as well as what we believe is best to drive value in the category.

The way I think about state of the union and what's coming out in the synopsis would be, we don't get too macro with the retailers beyond our category. A lot of these meetings typically focus specifically on the category, so a lot of our discussions entail what we can do, what solutions we bring to the retailer to continue to drive value in the category.

I think that's been apparent in both the brand equity improvement we've seen in our brands, and the share build that we've seen in our brands, and we are going to continue to do that going forward. But those typically are with the meetings consist of.

(Operator Instructions)

Bill Schmitz, Deutsche Bank.

Hi, guys, good morning.

Morning.

Can you help me with the math on the sales growth this quarter? Because I think you said going in -- and I know you addressed it in the opening remarks, but there was an $18 million benefit from the EcoAdvanced shipment that last year and then you talked about the $12 million pull forward of orders.

So on that math, it seems like organic would have been 9% this quarter, if I add back that $30 million and I take it out of the base effectively. So, and I know you said, I think, 3 points was distribution, is that predominately just more of facings at Walmart? Because I don't think you're back into Sam's yet, and I don't know if that's an opportunity. But just trying to figure out how sustainable some of these gains are, and if there's any -- if you're missing any incremental distribution going forward. Then I have a follow up on gross margin.

Let me try to break down the 0.5% organic growth. The 3% distribution gains, that's gains in the US, it is gains in EMEA where we've had six consecutive quarters of organic sales growth. And it is getting additional facings, it's continuing to execute well in store, and so that I would think about is volume gains, volume gains that we saw last quarter and we saw this quarter. And as the organization continues to focus on achieving profitable share, hopefully gains that we can count on through the balance of the year and then some.

EcoAdvanced, so EcoAdvanced last year second-quarter sales were roughly $18 million. This year, EcoAdvanced sales were roughly $8 million or $9 million. Last year's elevated sales was really reflective of filling the pegs, new displays, it was our launch in the US.

And so we had called that out for some time as there was a one-time pipe fill related to EcoAdvanced in quarter two of the prior year, that we knew that it would be a difficult launch. We've now reached a normalized run rate sales as related to EcoAdvanced. But the year-over-year comparison represented an overall 3% drag on total net sales.

There was 0.5% impact from incremental storm volume that we wanted to call out, and then overall price mix was flat. So there was a decline in Asia, specifically Asia developed markets, where we have called out increased competitive activity and certain discount retailers; but rest of world saw pricing mix gains that offset that decline in Asia. So hopefully that helps piece together some of the moving parts within our 0.5% organic growth.

Got you. And in the US, was it predominately Walmart? Because it seems like you got more facings in the quad, and I don't know if there was more than that.

Yes, as a general rule, we don't talk about specific customers. Here's what I can tell you. You'll remember that since investor day, we've given a challenge to the organization to really focus on driving effective category fundamentals.

So think about that as gaining new distribution, expanding distribution, winning in store through both improved availability and visibility, and making sure that we have the right mix of brands and products priced right in the store. In this category, doing those things exceptionally will allow you to drive accretive value in the category, not only for Energizer but for the retailer. That continues to remain our focus.

I would encourage you when you get a chance over the next quarter, walk the stores and you will get the opportunity yourself to actually see a lot of the gains that the teams have made, both domestically and potentially abroad, if you are abroad. But our focus will continue to be that going forward, and it really gets back to Nik's question earlier on what we talk about at NACDS. The real focus is on those types of things that we know are going to drive value in the category.

Okay, that's helpful. And then just the gross margin bridge, were you always anticipating you were you're going to spend those incremental investments on capabilities and improving the product attributes? Because I just thought in batteries, improving product attributes was just adding more zinc to the battery; tell me if I'm wrong. But then how much of those costs will you have to incur going forward?

Is this a one-time thing? Because I really don't understand what exactly those investments were. Because if it was software for promotional spending, I think that would be capitalized and not expensed. So I know it is a complicated question, but I would love any color you could provide.

Brian and I will tag team on this one, because there's two parts to the question. Let me start with the front part of the question. So our intention was always to reinvest back into the business.

Again, if you go back to the three core tenets on uses of cash, investing in the business to continue to strengthen our brands and strengthen the overall platform of innovation was one of our core tenets. So from the get go, that has been in our plan. It will continue to be going forward, you can expect that.

It terms of the breakout, I will hand it off to Brian to maybe get into that a little bit more. But think about productivity, driving productivity gains, and leading with innovation is two of our core strategies, operating with excellence being the third. Our plan is to continue to invest in all three of those, whether be incrementally or as part of our base strategic plan year on year.

Maybe I will turn it over to Brian, and he can get to into more of the detail you were asking about the second part of the question.

It's definitely a lot of moving parts within our gross margin rate, specifically for the quarter. 180 basis points decline due to currencies, 30 basis point decline due to Venezuela, and a 220 basis point decline driven by product improvements. And so as Alan talked about within his prepared remarks, we have introduced innovation and product improvements across almost our entire portfolio.

With those, whether it is increasing the performance of Energizer Max and Ultimate Lithium AA, it requires an investment. And we had planned on that investment heading into the year, but also our strong start to the year allowed us to accelerate some of the productivity initiatives.

We've talked about year over year, we have to find ways to continue to take costs out of this business. But our strong start to the year allowed us to accelerate some of those initiatives, as we are very proactive and addressing our capacity utilization.

So within this quarter, there was restructuring that was included in the gross margin rate as it relates to right sizing some of our manufacturing capacity And that definitely had an impact within gross margin rate, but it was not contemplated but at the beginning of the year, but our strong start to the year allowed us to fund that investment.

Keep in mind, we expect to benefit from that moving into FY17 on those incremental investments, and we'll have to monitor those as we go. But that's part of the plan.

Bill Chappell, SunTrust.

Good morning, thanks.

Morning.

Alan, just a little bit as we look back six months to date, in the organic growth, on a blended basis at least, mid-single digits. And can you talk little bit is that market share overseas, are you seeing devices worldwide start to stabilize or grow? And how does that change your longer-term outlook of low single-digit declines for the category and top line?

Let me start with the latter part of the question first, Bill, if you don't mind. So our outlook for the category is consistent with what we had communicated since investor day. We are still projecting low single-digit volume decline in the category over time.

Keep in mind that there are differences between geography and segments and how they impact those numbers. So let me just give you some examples, and then we can talk a little bit more about what we are doing going forward.

In North America, we would expect volumes to decline low single digits over time, but value is estimated to trend more positively. And that's really a result of the mix shift that we are seeing occur through premium performance and specialty and away from the price value segments.

In Asia, particularly Australia, it is a highly competitive market. Discount retailers have entered that market with strong private-label programs. You are seeing the regional players respond in kind to defend their share positions, and as a result we would expect that volume growth would continue but that value growth would lag.

When you think about LatAm, we are seeing continued conversion from the carbon zinc to the alkaline sub segments, and high inflation in many of our markets. So as result, you would expect volume will likely decline but value will grow modestly.

And then in Europe, Middle East, and Africa, keep in mind that it is a highly competitive market, and you do have of a high level of penetration of private label in those markets. So we would expect at best, modest volume and value growth. So that's an overlay of our expectation of how geographies and the segments will impact the category going forward.

But I do want to take a minute, let me just talk a little bit about devices. Over the short term, we do expect the Internet of Things to create a class of devices that will require primary powered batteries. We're beginning to start to see growth in that particular sector, think about that as smart home and smart health devices, so devices like the Nest thermostat, you might have security systems or remote blinds.

These all require primary round cell batteries. So that will help the category near term, but over the long term we don't expect any significant device or demographic trends that would alter our current outlook for the future category.

In terms of the organic growth, again, and here's the way I would think about it. Our strategic positioning has not changed, and will not change. Our understanding of this category goes over three-plus decades with the current management team, and we understand what it takes to win and compete in this category.

You would expect that we have very well-defined plan on where and how we will win, and a lot of that really entices against what we alluded to earlier of focusing on effective category fundamentals. So again, it is that idea of availability and visibility, which is both distribution and really leveraging and integrating the shopper's path to purchase going forward.

We would assume that omni channels will continue to have some influence on the current brick-and-mortar play and online play, e-Com. So we're expecting that we're going to have to continue to shape strategies on that going forward as well. But overall, we are very comfortable with our call of low single-digit decline overall for the category, and up low single digits for Energizer's organic revenue, given some of the trends we are seeing both from a device, demographic and geographical standpoint.

That's great color, thank you. Brian, and might have touched on this, the outlook or where you stand on zinc, and I'm going to forget, it's electromagnetic -- you'll have to pronounce it for me.

EMD.

Thank you.

So, zinc, we are seeing favorability. So our full-year outlook on commodity and other product costs, and other product costs primarily relate to a lot of the source product. If there's commodity favorability, some of that flows through to as well. Full-year outlook $15 million to $20 million year-over-year favorability. With zinc, that's adding to that amount.

Our pricing, we are about 85% locked in for the full year, and so our outlook is pretty solid. But we are seeing favorability across all the commodities. Zinc represents about 5% of our total COGS spend, and steel cans actually represents about 9% of our total COGS spend.

William Reuter, Bank of America/Merrill Lynch.

Morning, guys. I just wanted to follow up a little bit. When you were asked early on about acquisitions, you gave a big picture view. I was wondering if you could just update us near term, in terms of whether you guys are seeing a lot of opportunities? I think a quarter or two ago, you guys said you'd looked at stuff but it didn't fit either your financial or operational constraints.

Hello, it is Alan, how are you doing?

Good.

Good. So as I said, we have been -- we're roughly nine months old, and since July 1, the spin off date, I can tell you that Brian and I and the management team have been very aggressive in this area. A number of really appealing opportunities have come across the desk that we have explored. But for any number of reasons, whether it be fit, it didn't meet our financial characteristics, the business characteristics, didn't work, or some combination of all three panned out in the things that we had been exploring.

I will tell you that from an M&A standpoint, our criteria has not changed since investor day in the terms of what we are looking at. Again, thinking about in the household space or adjacent categories. We're really looking at strong financial characteristics, again, free cash flow profile similar to what we are used to managing, strong and stable margin profiles.

These are all the things that we'll look at, but a key is going too, making sure we are acquiring those US cash flow earnings, and being able to put our international cash to work. So there's still a lot of things that are on the table for us today that we are looking at, and we will continue to look at.

I didn't want you to think in any way that this is second thought for us. We are very outwardly focused as an organization in terms of opportunities, both with our retail partners and in terms of acquiring those earning streams, and that will continue going forward.

Okay. Just one more quick one before I pass it on. Advertising was down, you'd talked about -- it sounded like it was due to timing. Does this imply that, I guess, we would expect that your advertising expenditures are going to increase in the back half of the year on a year-over-year basis?

The way I would answer that for you is, we're very consistent with the guidance we've given on A&P. We are still planning on our outlook for the full year as a range of 6% to 7%. We were 5.4% for the quarter this quarter, again, keeping in mind that we're lapping significant A&P investments in the prior-year quarter timed to the launch of EcoAdvanced in North America.

So a lot of what you are seeing in terms of the quarter down, that shift of 290 basis points is really a result of lapping. There was some certain A&P activities that is timing related, but the majority of it is lap. But I think for the full year, again, to support what we're doing in our innovation plan, you can expect that range of 6% to 7%.

Keep in mind last year, A&P as a percent of sales was ramped up to 8.1%. We will do that in support of an innovation launch or a specific initiative, but long-term outlook, 6% to 7% is how we are thinking about A&P as a percent sales.

Jason Gere, KeyBanc.

Good morning, guys. I guess I just wanted to follow up on something you've talked before. You were talking about some of the international markets, so I guess you are talking about pricing now coming through and I'm assuming for LatAm to offset some of the FX that's out there.

As we start to look out, and obviously, none of us have a crystal ball, but if currencies start to stabilize -- I guess, one, I was just trying to figure out how the gap is in terms of a price perspective between you and some of your competitors. And then how you try and ensure that as price eventually rolls off, you maintain the volume, because it feels that the volumes sides maybe sounding a little bit better in some markets? So I was just wondering how you think about the next 12 months from a price volume perspective in emerging markets?

Yes, it is Alan. So a couple of things. First, when you think about pricing in general, and we will start with the latter part of the question. The volume metric piece is really driven by our focus on the category fundamentals in store. So executing availability, visibility along the path to purchase, getting our brands listed, increasing distribution and space, so regardless of pricing that is still a core tenet of what we will focus on.

The pricing element, as you know, we take pricing every year in select markets both for macroeconomic reasons and where we've introduced new innovation to a market where we think pricing is warranted, and we will continue to do that. For us, that's an important part of what we do. In hyper-inflationary markets, if in fact currency trends were to improve and that weren't required, it doesn't keep the teams for focusing back on those category fundamentals, that will continue.

One thing I will say is that, while we don't provide as a general rule an outlook on forward pricing actions, we do monitor pricing and promotion in all of our markets regularly. And we use the findings to really guide a lot of our decisions long term for how we are going to manage the business, and that will continue going forward.

I think as you think about pricing in some of the international markets, we did take pricing this year where there was hyper inflationary activity. And in some markets, because of the innovation we brought to market, we've been able to take pricing as well. And in both of those cases provided we feel we can add long-term value to the category, we'll continue to do that.

Okay, great. Thanks for the color, guys.

Thank you.

Stephen Powers, UBS.

Hi, good morning, thank you. I want to clarify on the new product investments in gross margin that we were talking about earlier. Just to be clear, were you saying that these new product improvements are somehow structurally gross margin dilutive? You cannot get the appropriate price enhancement for the new functionality, or do you expect those investments to be net temporary and ultimately accretive to gross margin?

So it's an investment that we are making this year. It's helping bring the marketing news, product news and a full innovation calendar to retailers and consumers.

And the way that we look at it is, that it is an investment this year, and there's going to be a level of investment every year as we continue to bring a constant stream of innovation news. But this year, the investment was higher than normal. And it really speaks to a lot of the innovation items that Alan outlined within his prepared remarks where we are innovating across our full portfolio. But this size of investment is unique to this year.

Okay, that's clear. And then another cleanup on the shelf space gains. I know you are always looking for more, but is there way to frame what portion of the three points this quarter will be cycled in the next few quarters, versus incremental gains experienced in Q2 that will persist until we theoretically lap them a year from now?

That's a great question, but it is actually not an easy one to answer, here is why. Decisions made by the retailer on when those get executed and the actual timing of those executions, they are very fluid for a whole host of reasons. Everything from feet on the floor to be able to get things done, to the timing of the retailer driving approval through their system, to getting the supply chain, product availability, all those things buttoned up.

I think what you would expect is, if you have wins this quarter, it may take -- it may be a quarter to two, post-decision that you'll start to see those flow through. So as we get distribution wins, the timing of the them actually hitting the store and the organization reaping the benefit from that, can be anywhere from a quarter to three quarters lag, depending on how large scale the distribution or space gains are.

Kevin Grundy, Jefferies.

Thanks, good morning, guys.

Morning.

Brian, question on the EPS guidance. So it moves up by about $0.05 to $0.15 from your prior guidance using the upper end of the prior guidance, as you guys stated. And my math suggests that it can be explained at the midpoint at least by FX and the tax rates.

So I'm just trying to get a little bit better grounded here into the element of conservatism that you might have baked into the guidance. And you talked about some of the commodity cost favorability versus some of the timing issues that impacted the quarter, specifically with respect to retailer inventory levels; and then I have a follow-up.

Your tracking -- the math that you laid out is that obviously we're benefiting from the effective tax rate and then also improved currencies. As far as the balance of the year, obviously there was an improvement in currency rates. But currency rates on a year-over-year basis is still going to be headwind, and especially when you are comparing versus prior year.

We will be facing another quarter of carve-out financials in quarter three, and as a result SG&A and other financing, that year-over-year comparison in quarter three is going to look very strange. Our run rate SG&A over the last few quarters has been in total around $80 million. In quarter three of last year, it dipped down to $69 million.

And the other financing, as an example, it was a credit of $6 million in quarter three and then $6 million in quarter four. So, there's going to be some comparability issues definitely next quarter that needs to be factored in.

As far as overall conservatism within the forecast, keep in mind, as we've talked about increased investment spending. The strong start to the year has allowed us to do that, and at this time we feel confident in our guidance of $215 million to $225 million. But still remember that there's a lot of volatility within currencies, and if that were to materially change, that's the caveat that I still want to throw out there.

So you left yourself a little bit of wiggle room in the event that you get some further -- that the dollar goes the other way and you see some strength in the dollar, is that fair? I just want to make sure I understand correctly.

Within that wide range, obviously it's a $0.10 range, so it provides some wiggle room I guess. But also keep in mind, in the back half of the year, we will -- we expect to realize the deload. We left quarter one retail inventory levels higher than normal.

We expected that to deload to happen in quarter two; it did not yet. But we still believe that's going to happen over the balance of the year.

Okay. And then just the follow-up is just the Nielsen data suggests there's a bit of an uptick in Duracell promotional pricing, not huge, but it has increased a bit. And I know that asset just recently changed hands, so it's still quite early. So is that consistent with what you are seeing, maybe even beyond US track channels, and if so, is it concerning at all or just very early days? Thank you.

One way to think about this, let's -- let me break it into two parts for you. So in the latest 12 weeks, and think US because it's where the most robust information is, the promotional environment was really stable and consistent with the prior year. Really what we do, if you think about the 52 weeks, that's where you will see the bigger trends.

And in the US, both the frequency and depth of promotional activities has actually decreased over the latest 52 weeks. The percent of volumes sold on promotion during that time is down almost 4%, and you are seeing all brands reduce promotion in that 52 week period.

As we look forward, and if you think about the broader part of that, a lot of that was driven by a reduction in the number of TPR's, features and displays that occur. So you are seeing a decrease across all the different mediums used within promotion.

As you know, we don't comment on what competitors to. What I can tell you is that Energizer is going to continue to think about promotion this way. Retailers will always have promotion as a key part of how they go to market, it is how they reach their customers in store by driving trial.

We will continue to participate in promotion, but we will look for highly efficient promotions that generate the highest ROI. And allow us to be able to generate, again, long-term value for not only ourselves but for our customers in the overall category; and that will remain our focus going forward.

Matt Schwartz, Bernier Capital.

Thanks for the question. We had heard that Energizer was planning on closing the Bennington, Vermont plant. Can you confirm that, and could you also comment if you expect this to be material?

We don't comment on future activities, and we have not made that statement. Just so you are aware.

All right. Okay, thank you.

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

Yes, for our investor Partners, thank you again on behalf of the management team for participating in our second quarter FY16 earnings call today. We appreciate your time and your questions, and we look forward to continued communication with you. Thank you.

Thank you, sir. This concludes today's presentation. You may now disconnect your lines and have a wonderful day.

Thank you.