Energizer Holdings Inc (ENR) 2016 Q3 法說會逐字稿

Good morning. My name is Allison and I will be your conference operator today. At this time I would like to welcome everyone to Energizer's third quarter FY16 conference call. After the speakers' remarks there will be an opportunity to ask questions.

(Operator Instructions)

As a reminder this call is being recorded. I would now like to turn the conference over to Jackie Burwitz, Vice President of Investor Relations. Please go ahead.

Good morning. And thank you for joining us. During the call we will discuss our fiscal third-quarter results and provide an update for our full-year 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 about our expectations for future plans and financial and operating performance. Any such statements are forward-looking statements, which reflect our current views with respect to future events.

We will also refer to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP is shown in the press release issued earlier today, which is available in the investor relations section of our website, energizerholdings.com.

Information concerning our category or market share discussed on this call relates to markets where we compete and are based on estimates using Energizer's internal data, data from industry analysis and adjustments that we believe to be reasonable. Investors should review our SEC filings for a description of the risk factors affecting our business. These risks 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. July 1 marked the one-year anniversary of our spin, and in our first full year as an independent company I am proud of what this organization has accomplished. We've been able to successfully execute against our three strategic priorities of leading with innovation, operating with excellence, and driving productivity gains enabling us to deliver strong operating results.

In addition, we executed our balanced approach to capital allocation by investing in our business, returning cash to shareholders through a competitive and meaningful dividend, opportunistically repurchasing shares and closing our first acquisition. This is consistent with the strategy we outlined at investor day last year. I'm extremely proud of our organization, our accomplishments, and our ability to deliver upon our commitments to our shareholders.

Turning to the third quarter. We again delivered strong performance as we continue to build on our momentum from the first half of the year, with organic revenue growth of 1.2% in the quarter and 4.4% on a year-to-date basis. Overall, business fundamentals remain solid. Global battery category value and volume were nearly flat over the latest 13 weeks. In addition, our global value share was up slightly as a result of distribution and shelf space gains.

In our largest market the US, total category value for the 12 weeks and through July 2, was down 1.5% and volume down 0.6% percent. This is in line with our long-term category outlook for developed markets. Promotional levels in the US were roughly in line with prior-year levels. Consistent with global numbers, Energizer's US market share was up slightly, reflecting our recent distribution and shelf space gains.

Now turning to our three strategic priorities: Lead with innovation, operate with excellence and drive productivity gains. In FY16 we have launched innovation across most of our portfolio. That has allowed us to drive distributions and shelf space gains. During the quarter, we continued to increased distribution of these products by expanding into more international markets.

We believe that 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, with the primary objective of driving effective category fundamentals to generate profitable share gains.

As I mentioned earlier, our commercial teams continue to deliver with both our global and US value shares up slightly. In addition, we've announced price increase across several markets including Canada, Russia and certain markets in Latin America, the Middle East, Africa and Asia. Competitive activity has continued to be heightened in some of our Asia-Pacific developed markets, and we have and will continue to take a very disciplined, targeted and balanced approach as to how we deploy our trade investment dollars.

Finally, we continue to drive productivity gains and are making good progress in our working capital, cost savings and free cash flow initiatives. We've been able to reduce working capital levels by more than half since the start of our initiative, down from 23% to 11% of sales. It's important to note that we will build inventory levels over the next two quarters as we prepare to support our customers with their hurricane response efforts, the upcoming holiday season and new business opportunities.

We continue to embed zero-based budgeting as part of our culture, and have imposed tight cost controls to maximize free cash flow. In the quarter we executed a planned productivity initiative in one of our manufacturing locations, and we will continue to proactively look for future opportunities. And while I'm pleased with the progress we've made in driving productivity gains, there is still room for further improvement.

Optimizing our cost structure has and will continue to be a top priority and focus for this organization. We will also continue to make investments in key IT systems and processes that will enable future cost savings and simplify our business. These initiatives and respective investments should help us continue to build momentum throughout the organization to drive future cost savings, enhance returns and fund future investments.

In addition to the strong performance with our battery business, on July 1 we also closed on the acquisition of HandStands Holdings Corporation, a leading designer and marketer of automotive fragrance and appearance products. This acquisition adds a highly complimentary business to our existing portfolio of strong consumer brands.

HandStands is a market leader in a growing auto fragrance category, with a strong track record of leading with consumer-focused innovation. Their products are sold through very similar channels in the US, with at least 75% of sales occurring with existing Energizer retail partners. There's also strong geographic distribution overlap in our core markets, with the potential for further expansion using our existing global battery footprint.

As part of our extensive to due diligence, we researched the category and HandStands' market share and retail position, and we believe we can accelerate HandStands' growth both in the US and globally. The category has experienced high single- to low double-digit growth over the past few years, and this growth has attracted new entrants. And while new entrants and an expanded consumer base have added value to the overall category, it has negatively impacted HandStands' market share over the last few months and will continue to impact it for the next two to three quarters.

However, despite this short-term impact, we believe we can grow this business by leveraging our merchandising expertise to strengthen the foundation of in-store execution. In existing retail partners we have the ability to increase the number of points of distribution throughout the store in high-traffic areas, and lever shopper-based solutions to orchestrate trade-up. There are also opportunities to expand these products into current Energizer retail partners, where HandStands does not have distribution.

In addition, we believe that we can accelerate HandStands' momentum by using Energizer's global battery platform, expansive channel distribution and global supply chain. As I said when we announced the deal, HandStands represents a compelling strategic, operational and cultural fit for Energizer, and provides us with the opportunity to enhance our ability to drive long-term shareholder value.

Now turning to our outlook for the remainder of FY16. We have worked hard to deliver solid operating results for the first nine months, and as a result of this strong performance we now expect full-year adjusted earnings per share in the range of $2.20 to $2.30. This includes approximately $0.04 to $0.05 of earnings per share contribution from the newly acquired HandStands business, excluding transaction and integration charges.

Now, I'm going to turn the call over to Brian for more in-depth financial review of the quarter, an update to our outlook for FY16, and more insight into the integration of the HandStands business. Brian?

Thanks Alan, and good morning everyone. I'll begin by discussing the financial overview of the quarter, provide insight into the HandStands business and our integration plans, and then close with a more detailed update to our full-year outlook.

As Alan mentioned, we continued our strong start to the fiscal year as organic sales increased, working capital levels improved and we executed additional productivity initiatives that we expect will drive future cost savings and margin enhancements. I'll touch on a few financial headlines in more detail.

First net sales. Total net sales decreased approximately 3.6%, driven by the following: organic net sales increased 1.2% due to the net impact of distribution and space gains in North America, and distribution gains and pricing actions in Latin America accounted for approximately 3% of growth, partially offset by approximately 1% due to continued heightened competitive activity in certain Asia developed markets, and approximately 0.5% of retail inventory deload.

As we discussed in prior quarters, retail inventory levels were elevated heading into this quarter. We began to see these levels normalize within the quarter, and expect the balance of the deload to contribute in the fourth quarter. Foreign currency headwinds impacted our top line by approximately $13 million, resulting in a 3% decline. Overall for the quarter, currencies were in line with expectations; however, rates remain very volatile and we expect this to continue in the near term.

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. Now that we have fully lapped these go-to-market changes, this will be the last quarter we experience a year-over-year impact.

Looking at organic sales performance across the four segments. North America organic sales increased $4 million or 2%, as a result of distribution and shall space gains, partially offset by the anticipated retail inventory deloads. Our Europe, Middle East and Africa organic net sales decreased $1 million or 1%, in line with the overall category value performance.

Latin America organic sales were up nearly $5 million or 18% driven by pricing actions across multiple markets, timing of shipments and distributor markets, and new distribution gains. In Asia-Pacific organic sales were down $4 million or 4.5%, due primarily to heightened competitive activity in select developed markets. The competitive activity has been elevated for the past few quarters and we're expecting the impact to continue into the September quarter.

Now on to gross margin. The gross margin rate for the quarter was 42.6%, or 300 basis point below prior year. The decline was driven by a 150 basis point impact from unfavorable currencies. Excluding the currency impact, gross margin declined 150 basis points, driven by a $5 million charge related to a plan productivity initiative, which resulted in a 130 basis point reduction to gross margin and increased costs and supported of innovation launched across our portfolio. These items were partially offset by favorable commodity costs and other product savings.

A&P spending was below prior year by $12 million or 310 basis points on a percent-of-sales basis. The decrease in the quarter is primarily related to lapping of the increased A&P support of the EcoAdvanced product launch in the prior year, and the timing of current-year advertising and promotional activities.

SG&A spending in the quarter excluding spin and acquisition costs, was approximately $81 million on absolute dollar basis, consistent with prior-quarter levels. However, the SG&A as a percent of sales, excluding unusuals, increased 380 basis points due to lapping a low prior-year comparative, incremental investment spending and higher compensation-related costs incurred in the current year.

As we've previously highlighted, the third quarter 2015 SG&A, excluding spin and restructuring costs, was unusually low as prior-year data was based upon carve-out accounting methodology, which is not necessarily representative of our standalone cost structure. We have now fully lapped the prior-year carve-out data, which will make future quarter comparisons much more meaningful.

Our tax rate on a year-to-date basis was 23.8% due to the favorable impact of adjustments related to the prior year provision estimates and certain spin-related adjustments of approximately $9 million. These adjustments are the primary driver of the $500,000 tax benefit reported in the third quarter. Excluding these adjustments, our year-to-date tax rate would have been approximately 30%. Consistent last quarter's full-year outlook, we expect our full-year ex-unusual tax rate to be in the range of 29% to 30%.

Spin restructuring related charges in third quarter were $2.9 million (sic - see press release, "$2.8 million"), of which $2 million was reported within SG&A. We've incurred $16.5 million of spin and restructuring related charges on a year-to-date basis, and expect to incur up to an additional $3 million over the remainder of the fiscal year.

Moving to the balance sheet. We ended the quarter with $567 million in cash, with greater than 90% of our cash held offshore. On a year-to-date basis we generated $126 million of free cash flow, reflecting our strong operating performance during the year as well as improvements in working capital. In addition, we paid a total of $46 million in dividends and repurchased 600,000 shares through the first nine months of the year.

Our debt level at the end of the quarter was approximately $1 billion, which equated to 3.2 times debt to EBITDA on a trailing 12 month basis. Before going into the outlook for the remainder of FY16, I want to provide more insights to the HandStands acquisition.

As Alan mentioned, we were able to close this transaction subsequent to the end of the quarter on July 1 for a purchase price of $340 million, subject to working capital adjustments. We utilized approximately $300 million of cash on hand and borrowings from available credit facilities. This leaves us with approximately $275 million in cash and leverage levels of roughly three times. We have made good progress with our integration efforts and expect that the business will be fully integrated by the end of FY17.

In total, acquisition and integration related costs are estimated to be $30 million to $35 million, and charges will be incurred over the next 12 to 15 months. Breaking this out, acquisition costs are expected to be in the range of $8 million to $10 million. Integration related costs are estimated to be $13 million to $16 million and the non-cash inventory step up accounting adjustment is expected to be in the range of $8 million to $9 million.

Once fully integrated we're estimating in excess of $5 million. As Alan mentioned, we are expecting the earnings per share impact, excluding the acquisition and integration costs, to be $0.04 to $0.05 in the fourth quarter.

Before I turn the call back over to Alan for closing remarks, I want to provide a few comments on our base business excluding HandStands for the upcoming quarter. Although fourth quarter FY15 organic sales were down 8%, we do not believe that will have a material impact from a year-over-year comparison standpoint, as the decline was a result of certain FY14 professional activities that were not repeated.

In addition, we expect retail inventory levels to further normalize, and heightened competitive activity in our Asia developed markets to continue, both of which will likely have an unfavorable impact on year-over-year net sales in the fourth quarter. We expect these items will be partially offset by the continued benefit of distribution gains achieved in the first three quarters of the fiscal year.

This will also be the first quarter in which our prior-year SG&A interest expense and other financing comparisons are based upon our standalone results, as we have now fully lapped the prior-year carve-out accounting data. We expect SG&A, excluding unusuals, to be near prior-year levels due to the timing of expenses and incremental investment spending.

Consistent with the view outlined above, and inclusive of our year-to-date results, the full-year outlook for our base business remains consistent with the assumptions we provided during last quarter's call. As Alan stated earlier, we are increasing our full year FY16 outlook for adjusted earnings per share to be in the range of $2.20 to $2.30 to account for the accretion from the HandStands acquisition.

It's important note that our outlook is based upon current foreign currency rates and trends within our competitive environment. In the event either materially change, our results may be impacted accordingly.

We will provide a FY17 outlook for our base business and HandStands during our fourth-quarter earnings call in early November. Now I'd like to turn the call back over to Alan for closing remarks.

Thanks Brian. To reiterate, FY16 is shaping up to be a strong year. 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. We continue to execute a balanced approach to capital allocation by reinvesting in our business, returning cash to shareholders, and adding to our portfolio through acquisitions.

As discussed earlier, we continue to make investments in our business through projects and process improvements that we believe will drive earnings and free cash flow growth in future years. Including our recently announced dividend payable in September, and share repurchases executed earlier in the year we will have returned nearly $85 million in cash directly to our shareholders. And as we announced on Monday, we are increasing our dividend by 10%, reflecting both the strength in our base business and our ability to successfully integrate and grow the HandStands business.

Following the HandStands acquisition we are forecasting $275 million of cash remaining, giving us a healthy balance sheet with manageable debt levels to continue to balance these three drivers in order to maximize long-term shareholder value. We remain committed to executing a balanced approach to capital allocation, and we have delivered against all three areas in our first full year as an independent company.

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

Thank you.

(Operator Instructions)

Bill Chappell, SunTrust.

Thanks good morning.

Good morning Bill.

Alan, if you could talk a little bit about what you talked about in terms of shelf space gains, recent gains that affected this quarter. Is that carryover from things you'd won six, nine months ago that are just following through? Or does that set you up fairly well, or incrementally better as we go into the holiday season for this year?

Yes. Think about it as both, Bill. It's really going to be setting up what's coming up, most of the changes that we saw in distribution and space really started to materialize in March and then up through June. And subsequent to that, there's been additional things that have occurred that we feel will benefit the business going forward.

But all in, I am very pleased with the distribution gains we've seen around the world and I think you saw from the prepared remarks, that was in North America where we saw both distribution and space gains, which increased the top line, and LatAm, it was a combination of distribution and pricing and hyperinflationary markets. Even in Europe where it's highly competitive we were able to gain distribution in select, certain European markets.

And Bill, this is Brian to build on Alan's comments. From our last couple of calls, we called out about a 1% benefit from distribution gains in Q1, about a 3% benefit from distribution gains in Q2, and that same 3% in Q3. So hopefully that helps give you kind of the flow as to what we're seeing flow through our top line.

And just as a kind of drilling down to that in the US, is at across all channels? Is there something more online that you're picking up as well? I'm just trying to understand, because some of the competition has talked about, everybody seems to be gaining share these days. So just trying to understand where you're winning it and where others might be.

Yes. Great question Bill. The simplest way to say it is: we are gaining share in both measured and non-measured channels, so that we are clear on that. Obviously we focus predominantly on the measured because of the size and scale of those particular customers. We've been able to do it consistent with what we've recommended our strategy was go-forward from Investor Day. We've been leading with innovation. Our teams have done a terrific job of leveraging that innovation with our customers to pick up new shelf space and to pick up new customers.

The second part of that is something that we get asked regularly about our in-store execution. It's one of the things that Energizer does exceptionally well, and it's not just the idea of bringing innovation to the table, it's about the ability to execute them in the stores. It's a combination of both that we are doing, and both measured and non-measured where we're seeing growth in bulk.

And by the way, the growth is, and share, think about it as profitable share. I don't want share for share's sake. We've got to do it by executing really strong category fundamentals, and we're seeing again that payoff in dividends in the US, North America as a whole, Latin America and in Europe.

Okay. Thanks so much.

Bill Schmitz, Deutsche Bank.

Thank you, good morning.

Good morning.

A couple things. On the gross margin, how much of these costs you called out, the new product attributes and the productivity and investments, how much of that is sort of permanent and how much of that goes away, and when does it go away?

Bill, this is Brian. Two-part answer to that question. First for the full year, we guided gross margin down 250 basis points, primarily related to currency in Venezuela. That makes up about 180 of the 250 basis point decline.

These productivity initiatives. Think about it as continuing to right-size our cost structure is reduction in staffing in certain of our manufacturing locations. Year to date it's been about an $8 million charge within cost-of-goods sold. On a full-year basis that will result in about a 50 basis point impact. That's a discrete item that was recorded this year, $3 million in Q2, $5 million in this quarter. Those may or may not repeat into the future. It all depends on if there's an opportunity to be proactive and right-size our cost structure.

The investment in innovation and product improvements, that is an ongoing cost that we've added that is being offset by favorability within commodity costs this year. Now our challenge is, it's an investment but in future years how do we continue to take cost out. If we do nothing then that cost will stay, but we've got a track record of continuing to take cost out and we will look to do that.

The second part of that answer is specific to Q3. In Q3 gross margin was down 300 basis points. Half of that was currency, 130 basis points was that right-sizing of staffing within one of our manufacturing facilities, so that accounted again for 130 basis points, and then again investments in innovation were offset by commodities savings. Hopefully that provides some clarity as to what's discrete, one time in one nature versus what's ongoing, but even the ongoing we're going to look to find ways to continue to reduce costs into the future.

Okay. Got you. And then just a follow-up. Why wouldn't that be a restructuring charge, the first part of the question? Why couldn't you exclude it as restructuring? And then, I was looking at your EBITDA guidance and unless my numbers are way off, I had HandStands doing $9 million of EBITDA per quarter, so why wouldn't the EBITDA guidance go up by the extra $9 million from HandStands?

So a couple of things. As all companies are aware, that the SEC is really trying to limit the amount of GAAP to non-GAAP adjustments. We view, continuing to take costs out is part of what we are going to do, and as a result sometimes there's a charge related to that. If there's specific events as far as ongoing cost reduction efforts, we're not going to spike that out. We will highlight that as far as the year-over-year bridge. Now if there was a major initiative like the 2013 restructuring project Transformers, obviously we will spike that out separately. But if it's just ongoing cost reduction efforts, we will just highlight that in the year-over-year bridge.

Within the press release and also within the prepared remarks, we tried to separate to provide some clarity our base business and then our HandStands' business. So our base business, the EBITDA outlook of $280 million to $300 million, our base business, that outlook is not changing. For HandStands we provide EPS accretion of $0.04 to $0.05 and so --

Okay.

EBITDA will increase because of HandStands, but for clarity's sake we try to separate base business versus HandStands.

Great, thank you guys.

Thanks.

Kevin Grundy, Jefferies.

Good morning guys. I wanted to pick up on HandStands, specifically the accretion guidance, the $0.15 to $0.20 that you initially issued, and specifically with respect to the competitive landscape. Given some of the near-term share losses that you're seeing in US mass channels, and unfortunately looks like you'll have to contend with that over the next two quarters. A few questions around this dynamic.

Do you view the competitive landscape any differently now than you did perhaps even earlier in the year? During the due diligence process, Yankee Candle sounds like it's a big priority for renewal, and understandably so, Proctor seems like it is focused on turning the Febreze brand around broadly. Are there risks in other channels in addition to this US mass, do you view the competitive landscape differently, and are you still comfortable with the $0.15 to $0.20 of accretion, or do believe that perhaps greater investment will be necessary to stabilize some near-term trends? Thanks.

Kevin it is Alan, I'll start and I'll ask Brian to chime in where he feels appropriate. On the $0.15 to $0.20, yes we are comfortable. We are there, we are holding to that. On the competitive landscape, let me take a pass at that and Brian feel free to chime in as you see fit. Here's one way to think about this, is within battery and portable lights, within auto fragrance, within auto appearance and, candidly, in future acquisitions, whatever category we are in we're always going to have formidable and aggressive competitors. Some will be larger, some will be smaller, but all have brands that we're going to need to compete with.

I think the going-in assumption is, when we did our extensive due diligence in looking at the deal, we spent a significant amount of time understanding the competitive landscape. We were aware of the competitive entrants into the category, but like most consumer packaged-goods companies, we knew that this was going to be a category where we faced aggressive competitors. Just to kind of set the landscape going forward. This will be no different than what we face in battery and potentially what were going to face in future acquisitions.

So let's kind of talk specifically about HandStands now for a moment. As you think about that business there were some activities that transpired with a major US retailer in the beginning of calendar year 2016. You're starting to see the impact of those planogram changes in the share results now, and we expect that to continue the next two to three quarters.

Because this category has high, low single-digit, low double-digit growth, you can expect that it's going to have new entrants into the category, it's very attractive. And within general merchandise and hard lines there aren't many categories that have those types of growth rates. That's good for the category, and it's creating an expandable consumer base. Unfortunately it's had an impact on HandStands' overall share. Again, that's two to three quarters we expect that to continue.

But despite that short-term impact, I want to be really clear, Energizer believes that we can continue to grow the HandStands' business both in auto fragrance as well as in auto appearance for a number of different reasons. We believe that we've got the right merchandising expertise, and that we can grow their business because of our strong in-store execution.

In existing retailers we actually have the ability to help them get multi-siting locations in the store similar to what we do in battery. Remember these are pull categories, prompted purchases heavily reliant on multiple locations in the store. So that's where we're going to be focusing. If you think beyond that with distribution think about our ability, and given our proven track record, to be able to use our expansive channel span to get distribution of HandStands' products into customers and channels where they don't exist in the US today.

And then finally, I'll be honest with you, HandStands has really solid momentum internationally. Our plan is to continue to leverage our resources, our global footprint and battery infrastructure, our global supply chain and our broad distributor network around the world to expand HandStands' products internationally. We are going to that in a very disciplined, smart and selective way, but we see that as an opportunity to help grow the business as well.

So I just wanted to step back a little bit. The competitive situation and dynamic in whatever we compete in is going to be there. We're going to continue to go down the path and pursue the things we know how to do well, play to our strengths and again, that's one of the characteristics we loved about this HandStands' business is strategically, it is a terrific fit. The dynamics of how you run the business are very similar to what we know how to do well in battery and portable light, and were going play to that strength.

Brian anything you'd like to add?

No. Since July 1 there's been a full-court press on integration efforts. We're getting to know the business. We're getting to know how best to compete. We're excited about the innovation pipeline that they have ahead. The three strategic priorities that we've been able to execute in battery, leading with innovation, operating with excellence and driving productivity gains, that's the same game plan for this.

Also you know from a financial perspective, being able to use a significant amount of international cash and actually make this a delevering event makes this very attractive financially, and we think helps add to long-term shareholder value.

Very good. Thank you.

Thanks Kevin.

Nik Modi, RBC Capital Markets.

Yes thanks. Good morning everyone. Question is on the cost structure. Now that you have four quarters under your belt I guess you have better visibility. How do you guys think about communicating go-forward cost opportunities, cost of opportunities? Will this be kind of, hey we're going to save x-amount, or will it just be part of your ongoing earnings algorithm? That's the first question.

The second question, maybe Alan, could addresses this? Is just the tradeoff between A&P and kind of the in-store spend, right feet on the street, the execution stuff that you talk about. Can you just talk about, kind of how you think about allocating resources between the two.

Brian, do you want to start with the costs and then I'll follow on the execution.

On the cost side specifically related to SG&A and cost-of-goods sold. We've talked several times of how we've launched zero-based budgeting efforts, those have already paid dividends, we were able to offset the synergies from the spin much faster than we expected. Those efforts continue. As far as how to communicate and how we're going to communicate externally, it's really going to be twofold.

One it's going to be next November, as we provide annual guidance, our 2017 guidance. We're going to talk about the shape of the P&L, and what are some of the expectations shareholders should have of us heading into next year.

And then part two, it is going to be ongoing as to what we do and how we're going to win going forward. I wouldn't view it as a big bang massive restructuring effort. We did that with the 2013 restructuring. But if we do this right, we're going to continue to find ways to reduce costs and operate more effectively and efficiently on an ongoing basis.

And then Nick, just to follow on the question around execution. I don't want to divulge too much because I don't want to tip my hand competitively, but here's the way I'd explain it to you. Think about, we've got two models, we've got a direct-to-retail model and then we've got a distributor-base model. We believe that from an execution standpoint in terms of reaching the customer, we're going to leverage both of those in both developed and developing markets. We believe those are two strengths that we have that we plan to leverage.

So I'm going to dive down to a level lower now, when you start to get into the store there's two ways we can handle this. In the more modern trade we have a lot of either brokered or direct-to-store resources, call these feet on the floor. These folks, because of the adjacency to the battery category in many of these stores, they have the opportunity to merchandise, gain new placements in the store, think about how they manage and expand facings, the way they get off-shelf placement displays, all of that work will be done by those merchandising groups in what we would consider to be developed markets and modern trade.

When you think about developing markets and traditional trade, a lot of the work that the distributor does is really around placement in small kiosks or sari-saris if you are in the Philippines, it is really different market to market. But their job will be to ensure that we get prime placement and exposure of the HandStands brands right alongside batteries in a lot of those locations.

One of the reasons that I like this Company is again, when we had personal care, you could have a hectare of distance between your two brands in any given supercenter. In a lot a cases these products are adjacent to each other, so there is also an efficiency play in terms of windshield time of our merchandisers in the store and the fact that we can leverage those more efficiently than we can with just batteries only.

Great. Thanks.

Thank you Nick.

Olivia Tong, Bank of America Merrill Lynch.

High this is Chris Carey on for Olivia. Thanks for taking her question. If we can just bring it back to organic sales, they continue to come in at a pretty solid pace. Pricing, cost and inflation has benefited, but if that benefit slows what is your view on the ability to offset some of that? Can you maybe talk about the innovation pipeline from here, and potentially the runway for incremental distribution gains, I think you noted some of that in your prepared remarks, whether through new channels or geographies. And then I have a follow-up.

Okay. Chris it's Alan. I'll take this and ask Brian to build if you don't mind. Let's start with the distribution. As you know we are in the majority of channels that exist around the world. There are some gaps in channels where we have distribution that we are currently pursuing. Those discussions with customers are currently underway. As you think about our ability to expand distribution, most of that expansion will come in non-measured channels and it will come in the form of international expansion.

On the international expansion, and I've been very clear with the team and certainly externally, we will only expand internationally where it's profitable. We went through a significant go-to-market structure change over the course of the last few years, and we're going to be very disciplined in terms of markets where we expand our products going forward, and the same will apply to HandStands. It's not profitable then I'm not sure I want it.

As you think about how we drive our business going forward and again, this will be very consistent from Investor Day, this category is not only overly complicated. We will continue to focus on effective category fundamentals. Beyond distribution, which you can basically -- it's the equivalent of availability, it really becomes about visibility. That means you've got to have the right quality locations in the store, you've got to have more than your fair share of shelf in those right locations and candidly, you've got to manage the mix, both the price of the products and the range into the products, where you have the distribution. It's a combination of those things plus the distribution that actually allow you to drive your base share.

Now you'll notice I didn't talk about promotion. We will do promotions as long as it aligns to a retailer strategy, and that it generates an acceptable return. But we're not going to run promotion from a promotion's sake to gain share and distribution. We're going to do this the smart way and really continue focus on effective category fundamentals.

So as you think about our model going forward, there is the opportunity to expand distribution, a little more limited in battery, definitely advantageous for us in HandStands' business. But from a space standpoint and the quality of the distribution in the retailers that carry it, that's where we see a bigger opportunity and candidly, given our decades of experience in leading category management, we think we are well positioned to be able to capitalize on that. Brian?

No, that's good.

Thank you Chris. And your follow-up?

If I could, just to transition to a little bit more inorganic growth. I guess state of the union on your thoughts on M&A, you mentioned cash and roughly three times leverage. What is your comfort level around leverage? How do you think about that, and how soon you might be looking to potentially look for additional acquisitions in the space if they come up? Thank you.

Chris again, I'll take a pass and ask Brian to chime in. Currently we're right around 3.2 times debt-to-EBITDA leverage. We are comfortable in that space right now. We don't speculate on what future could be so I won't go there.

But what I will tell you around M&A, and a couple of things. HandStands certainly provides us with the platform to consider future acquisitions in auto appearance, auto fragrance and think about aftermarket auto. We believe it does provide that type of platform. We're certainly open to conversations with companies that have those types of businesses to see whether or not they would meet our business and financial characteristics. But I like to be clear on one thing.

First, our priority number one is a successful integration of HandStands into Energizer Holdings to make sure that we deliver on the commitments we made when we set out and announced this acquisition. That's priority one. I can tell you that Brian, John and I are spending extensive time already looking at what the next potential opportunities are. Those will be in the household spaces I've indicated before. I don't want to lock into just one category.

We are going to continue to look at several categories, and those that meet both our business and financial characteristics will be considered as potential, again with the objective of delivering long-term shareholder value. But keep in mind that the M&A piece is part of a balanced approach, it's one of four levers that we believe we have to pull, along with investing back into the business, delivering the return of capital to shareholders both through share repo and a dividend. And then certainly M&A.

So I think we will keep you posted on that, but I can tell you we're continuing to look at opportunities as we think about how we broaden our portfolio and again, create and deliver long-term value for our shareholders.

The only thing to build is, and this is consistent with what Alan and I have said in the past. We're not going to do M&A for M&A's sake. We're going to find the right fit. And so Alan and I, and John, are continuing to look at other opportunities. It took us a year to find HandStands and what we felt was the right fit. But also want to stress that we're taking a balanced approach to capital allocation is really important.

We just announced a double-digit or 10% increase to our dividend rate. Dividend is a key part of how we're going to deliver long-term value to shareholders. In just one year since spend we've been able to execute across all three, investing in the business, a meaningful and competitive dividend, we repurchased shares earlier in the year and we just closed on our first acquisition. It's really looking and continuing to take a balanced approach and making sure that if M&A opportunity comes about, it's the right fit.

All very helpful. Thank you very much.

Thanks Chris.

Jason English, Goldman Sachs.

A good morning folks.

Good morning.

Thank you for the question. First a quick housekeeping item. And then on to another question. The gross margin drag, I think I heard you in response to Bill Schmitz's question say that the amount of reinvestment in COGS aligned for productivity is effectively gone right now, as we enter the fourth quarter? So that pressure point abates; A, is that correct? And then also, currency has obviously been a big drag, on our math the gross-margin drag should be cut by more than half going into the fourth quarter? Is that consistent with how you see the world as well.

Jason this is Brian. On the cost-of-goods sold and the investment in the product. That is an increase to the cost-of-goods sold. We started seeing that impact at the end of the first quarter, and now that is an ongoing increase to our average-unit cost. We're can look to find ways reduce that, but on a year-over-year basis that's going to continue into Q4 and then part of Q1 of next year as well. Hopefully that makes sense.

As far as what is one-time in nature? That's the productivity initiative, the right-sizing of headcount as an example, that we executed in Q2 of $3 million and then in Q3 of $5 million.

As far as currency goes, you're right the impact is going to lessen. We saw that in Q3 and then in Q4 it will be much more comparable. But in Q4 it still will be a headwind at the sales line of about 1.5 to 2 points. It will still be a headwind, but the impact is lessening.

That's helpful. And then the bigger question. We like many others have contemplated the potential upside to earnings for you and the expansion of profit pull for the industry at large from trade-budget optimization, abatement of price subsidization, lower promotions, whatever term you want to throw at it.

My question is, from where you're sitting what do you think the likelihood is, is there any early indication as you look forward to holiday where presumably you guys are locking and loading the promotional calendar as we speak, so are there any early indications coming from those?

And then related, you're talking about distribution wins, Spectrum's talking about distribution wins. How should we think about the risk of rocking the cart here, and forcing some of the losers, because for every win on your side is a loss of someone else's. Forcing the loser on the other side to maybe react and not necessarily play nice when it comes to trying to become a little more rational for the industry overall.

Hello this is Alan. Let me take a pass and Brian will chime in for us. For holiday, generally as a rule we don't talk about specific customers. So I won't get into any detail of what's going to happen at any given customer. We write our holiday plans almost a year in advance with all the majors. These plans have been put to bed for some time. I'm very excited and believe we've got strong programs in place to compete effectively during the holidays. The key is going to be the execution, to be candid. And we've got our force set up to be able to execute with excellence again, in line with one of our core strategic tenets as a Company. I feel good about that.

As we look at distribution again, those types of plans typically are decided almost a year in advance when you do joint business planning with your customers. Now decisions are made shortly after that as customer-reset teams sit and agree and decide on what they're going to do differently in their mix. In this category, and candidly it's no different than when I ran the personal-care businesses as everyone's buying for distribution. It's a question of the fundamentals you apply against that, and the expected return you have on the distribution you're pursuing.

As we think about it, and I'll take Asia because I think it's a great example. There's a market where we have over a 60% share. We are able to leverage our dual-brand strategy in many markets. In certain Asia developed markets there have been distribution opportunities that we have vied for that candidly, if we're not going to make a profit and the margins aren't healthy, I don't want them. There are certain situations we will choose to walk away from because it's not a healthy position. In those cases you will see impacts to distribution.

In other markets, so take Australia as an example, distribution may have nothing to do with the manufacturer and everything to do with new retail formats that may enter a market. So in Australia you have a customer like ALDI entering the market with a strong private-label offering. That particular offering certainly creates disruption from both a pricing and a mix standpoint in any given market. When that happens, the regional retailers respond in kind, either through pricing on their own brands or pricing on national brands.

As a result what you're seeing in that market is volume up and value lagging as a result of that. Now keep in mind in Australia as a market, we have almost a 70% share, so certainly it's going to impact our business. That's why you're seeing in certain Asia developed markets, Energizer share and volume lagging the category at this point.

I will tell you though we certainly are addressing that situation, but we are going to do it smart, in line with the trade investment guidelines and thresholds that we put in place to make sure that whatever we do and pursue is profitable and helps us build our base share.

Just a couple things to build on. Obviously to your point Jason, for every winner there is a loser, that's always a risk. But I think it's important to understand what's happened in the battery category. All three battery manufacturers have introduced innovation within the performance alkaline segment. That shifted some of the share to some of the branded players.

We've also seen a mix shift into premium and performance and then also specialty brands, and also specialty battery types. And just an overall growth in specialty battery types, and so it's not always a zero-sum game especially with the specialty increase in demand. The good news is, especially as it relates to specialty we have a very strong share position so we've been able take advantage of that increased demand and growth within that sub-category.

Thanks guys, really helpful color. I'll pass it on.

Stephen Powers, UBS.

Great. Thank you. Building on that a little bit, and then I have a follow-up on HandStands. On the competition point. I know in the markets you cite Alan, in Asia-Pac as you begin to lap some of the competition as we think about into 2017, it sounds like it's going to continue but you feel like you have mitigation efforts, so it should dissipate to some extent as it impacts your business, that a fair read? And then -- sorry go ahead.

Please go ahead.

Thanks. The same kind of competition angle as it relates to North America. It sounds like you're pretty comfortable where things stand, but at least in the track channel data we've seen some more negative pricing dynamics the last few months, and I would just love your take as to whether or not that's a warning sign, or if you view the situation as more stable.

Let me start with the last question first on promotion. As you think about promotion let's start with 52 weeks. Both the depth and frequency of promotion in the latest 52 weeks in the US has declined. Overall volumes sold on promotion units or dollars is also down versus the prior year. For the latest 13 weeks your seeing promotion levels in line with the prior year, so the trends that we're seeing, if you look at the 52 weeks, the average AUPs, average unit prices, at retail for alkaline is actually up. We are very pleased with our renewed focus on the effective category fundamentals and we're going to continue down that path going forward.

So to your earlier question around APAC, and then we can address North America. In APAC as I alluded to, there is a dynamic there that is beyond really the manufacturer, this has more to do with new retail formats entering the market that was very used to high-margin structure the way they operated as retailers, and really broad assortment. This is a limited assortment retailer with laser-sharp pricing. You've seen the regional players react to that, that has certainly had an impact on all manufacturers, and not just batteries. And obviously given our strong position in that market, you would expect the outcome that we saw. We were anticipating that.

In terms of how we remediated I won't get into any specific details because again, I think that shares a little bit, it tips our competitive hand and I really don't want to do that. But needless to say, the choices that we make in those types of markets, whether they be Korea, whether they be Australia, are going to be really governed around generating profitable distribution. And we will continue to that by leveraging innovation that's relevant to consumers, as well as making sure that we execute appropriately in the stores.

We believe taking that path will allow us not only to help our base share, but it's going to help us deliver value to our retail partners in ways that traditionally manufacturers would not do. We understand what works in this category and we are going to continue to focus on those efforts. In North America, because it's closer to home for all of us, Jason there's an example where you may want to walk the stores yourself and I think you'll see some of the changes that have occurred at retail and distribution in certain customers.

Again, this is a very strong focus for this organization. You'll notice when Brian and I speak to the Investor community, we don't talk about promotion and we don't talk about taking share, we talk about effective category fundamentals. We believe at the base that is what is going to strengthen not only our business, but allow us to contribute value to the category. In North America that will continue to be our focus.

That's very helpful. If I could just -- quick follow-up on HandStands integration. Maybe Brian, could you just clarify of the $30 million to $35 million, what portion of that integration and acquisition cost do you expect to be cash versus non-cash? And then it sounds like the integration you are planning is fairly comprehensive, so more than just corporate-platform integration but actually supply-chain integration, sales-force integration et cetera.

I just want to validate that read, and then by extension, is this the level of integration that we should expect from you going forward on M&A? Because I think to some extent people are trying to assess to what extent you really are going to be an integrated operating Company going forward, versus more of a platform Company where the portfolio model is a bit more loosely knit. Thanks.

Quite a few questions there, which we appreciate. Let me answer the one around each deal being different. We're going to look at every deal on its own merit. And how we structure and integrate that into the Company and the potential synergies, that will be assessed deal to deal.

It really depends on what part of the household segments we choose to pursue, and what kind of talent we can acquire, the types of categories in businesses that we acquire. Again, we are going to look for highly comparable businesses that are good fits with us both from a business and a financial standpoint. But I'm not sure I want to commit that everything's going to be the same for every deal. We're going to assess them on their own merit. And then Brian, if you wanted to comment on the others.

Of the total of $30 million to $35 million of acquisition and integration costs, $8 million to $9 million is non-cash. That's the inventory accounting step-up charge. The remainder would be cash.

As far as the extent of our integration efforts. HandStands has and we acquired a very talented team. Very impressive within their commercial team, their product development team, their pipeline of innovation. We will take advantage of being able to integrate some of the back office services, and then also leverage our global supply-chain network. So it's really going to be a hybrid approach as to how we integrate. More fully folded in with the back office, but really looking to supplement the talented team that they already have within commercial and also product development with the teams that we already have around the globe.

Thanks.

William Reuter, Bank of America Merrill Lynch.

Good morning guys. Most of mine have been answered, just had a quick follow-up on the question about M&A earlier. You mentioned total leverage of 3.2 times, and I think the question was asked about what you guys would take it up to, and I'm not sure if I heard an answer to that. Do you guys have perspective, and has that changed at all?

Our perspective hasn't changed, and it's really hard to speculate. We'll evaluate every deal on its own, though a lot depends upon the cash flow characteristics, how quickly we'd be able to integrate, how quickly would be able to realize the synergies and pay down the debt. Really, the take away is that currently we'll award around three times, that's a good level where we can capitalize upon opportunities but how high we would go, it's really deal dependent.

Okay. And then lastly, with 90% of your cash located overseas, do you guys have a sense for how much cash you guys need to keep on the balance sheet?

With part of the HandStands' acquisition, we were able to utilize a fair amount of international cash for the acquisition. It was actually a delevering event, so we are going to go from about 3.2 times to around three times leverage levels. We've upsized our revolver and we will have drawn around $50 million of that $350 million revolver. So we have plenty of firepower and access to liquidity.

Okay. That's all for me. Thank you.

Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Alan Hoskins for any closing remarks.

Thanks operator just to close. Again we appreciate everyone taking the time to join the call today and your interest in Energizer. We're very pleased with the strong quarter and the strong start to the year. The fundamentals of the business are strong and we're very pleased with our ability to continue to deliver value to our shareholders both near term and long term. Thank you everyone for your time.

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