Energizer Holdings Inc (ENR) 2016 Q4 法說會逐字稿

Good morning and welcome to Energizer's fourth-quarter and FY16 conference call.

(Operator Instructions)

I would now like to turn the conference over to Jackie Burwitz, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you for joining us.

During the call will discuss our fourth-quarter and FY16 results and provide an update to our full-year outlook for FY17. 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 www.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 review 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 showed in the press release issued earlier today, which is available in the Investor Relations section of our website www.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 adjustment that we believe to be reasonable. Investors should review the risk factors in our form 10-K and our other SEC filings for description of the key factors affecting our business. These risks may cause actual results to differ materially from our forward-looking statements. We do not undertake to update these forward-looking statements.

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

Thanks, Jackie, and good morning everyone.

Before we get into our fourth-quarter results I want to take a moment to reflect on FY16, our first full fiscal year as a standalone company. Through the committed efforts of the Energizer colleagues around the globe, we exceeded the challenging financial and strategic objectives that we set for ourselves. FY16 had strong organic sales growth of 3.7%, and delivered adjusted earnings per share of $2.31, above the top end of our previously provided Outlook.

We have consistently stated that our primary objective is to maximize free cash flow. During the year we gained profitable share, continued to improve working capital, and achieved cost reductions. These efforts result it in $167 million of free cash flow, exceeding our goal of $150 million for FY16.

We achieved our financial objectives by leveraging our three strategic priorities, leading with innovation, operating with excellence, and driving productivity gains. This was successful as we launched innovation across most of our product portfolio. This innovation included our new and improved flagship Energizer Max product, our best performing Energizer Max ever.

We expanded distribution of our EcoAdvanced product, the world's first battery made with recycled batteries, into new markets around the globe. We also implemented performance improvements with our specialty and lithium batteries, and rolled out new product offerings in our lighting business. Our recent acquisition of HandStands is also known as an innovation leader within the auto fragrance category, and we intend to continue to build on their already strong commitment to innovation.

The strong year of innovation helped drive the distribution gains and increase our organic net sales of 3.7%. Investing in innovation is a key driver in how we achieve sustainable and profitable share gains, and how we will deliver value to Energizer consumers and retail customers, in the years to come. We operate with excellence by executing effectively on the category fundamentals, which is critical to our success.

Through the focused efforts of our supply chain and merchandising teams we drive in-store execution and shopper-based solutions to earn our retail customers business every day. We made sure our retail customers have the right product at the right location, at the right time, whether it be for everyday shopping or last-minute emergencies. And as a result of these efforts, we've achieved solid share gains both globally and in the US.

In order to position ourselves for long-term success, we have continued to drive productivity by removing costs, and improving efficiencies, while effectively managing our working capital. We implemented a zero-based budgeting process to ensure that every dollar we spend will deliver long-term value. Disciplined spending is a hallmark of lean, agile, organizations, and by embedding this cost conscious mindset in our company, we have achieved a number of efficiency gains in this past fiscal year, including offsetting the dissynergies related to the spend.

We've also leveraged our balanced approach to capital allocation in FY16. We invested in our business for the long term, provided a meaningful and competitive dividend, opportunistically repurchased shares, and applied our disciplined and selective approach to acquisitions. Let me expand on each of these.

First, we invested in our business. This included innovation that contributed to our organic sales growth; restructuring, to drive future productivity gains; as well as critical IT systems, that will help drive standardization and efficiencies within our base business, and for future M&A integration efforts. Investing in our business is critical to ensuring long-term performance, and driving superior cash flow generation year after year.

Second, we returned over $95 million of capital to shareholders, $63 million through dividends and $32 million through share repurchases. This included $10.8 million, or nearly 233,000 shares that we repurchased in the fourth quarter. We believe that consistently returning capital to our shareholders is an important component to our total shareholder return.

Finally, we have closed on a HandStands acquisition in the quarter and delivered adjusted earnings per share of $0.05 at the top end of our Outlook. In addition, we are making significant progress on our integration, due to the dedicated efforts of the HandStands and Energizer teams.

HandStands represents a great example of an acquisition that followed our acquisition philosophy of finding the right business at the right time in the right place and at the right price. We will continue to apply our disciplined approach to evaluating future acquisition targets, in the household products space.

The strong finish to FY16 provides momentum as we head into FY17. In the coming year, we have a solid pipeline of innovation, we'll remain focused on executing the fundamentals, and we'll continue to relentlessly focus on bringing up costs to drive productivity gains, all in an effort to maximize free cash flow and drive consistent year-over-year earnings growth. In total, we are expecting adjusted earnings per share to be in the range of $2.55 to $2.75, and free cash flow to exceed $180 million.

With that, I'll turn the call over to Brian for our financial review. Brian?

Thanks, Alan, and good morning, everyone.

I'll begin by discussing the financial results for the fourth quarter and then closed our Outlook for FY17. We finished the year with a strong fourth quarter, highlighted by continued organic top-line growth.

Total net sales increased approximately 8%, driven by the following. Organic net sales increased 1.7%, driven by approximately 3% from net distribution and space gains in North America and pricing actions in Latin America, approximately 1%, due to the timing of holiday shipments, and these gains were partially offset by an approximately 2% decline due to the anticipated reduction and retail inventory levels in certain accounts as they returned to historical norms.

The inclusion of the newly acquired HandStands business resulted in approximately 8% increase in net sales, these items were partially offset by $6 million, or 1.5% decline in net sales due to the impact of foreign currency headwinds.

Looking at our net sales performance across the four geographic segments for the fourth quarter, North America net sales increased $30 million, or 13%, primarily, as a result of the inclusion of the newly acquired HandStands business. Organic sales in the base business increased 1%, due to distribution and self space gains, partially offset by the anticipated retail inventory deload in hurricane sales in the prior-year fourth quarter.

Latin America net sales were down approximately $1 million, or 4%. Organic sales increased $2 million or 8%, due to pricing actions in the launch of EcoAdvanced in certain markets. The inclusion of HandStands increased net sales by nearly $2 million, or 7%. These gains were offset by the unfavorable country impact of nearly $5 million, or 19%.

Our Europe, Middle East and Africa net sales decreased approximately $1 million or less than 1%. Unfavorable currencies were partially offset by the inclusion of the HandStands business, as organic sales were essentially flat for the quarter.

In Asia-Pacific net sales were up nearly $5 million, or 8%. As organic sales increased $2 million, the acquisition added $1 million, and favorable currencies increased reported net sales by $2 million. The organic sales growth of $2 million, or 3% was driven primarily by distribution gains and pricing in select markets, partially offset by continued competitive pressures in Australia.

Now moving to the rest of the P&L, gross margin excluding the one-time accounting adjustment of $8.1 million related to the fair market value step up of HandStands acquired inventory and other spend and integration-related charges was 45.2%, or 140 basis points below prior year, driven in part by 60 basis point impact due to an unfavorable movement in foreign currencies, and increased cost as a result of the impact from investments and product innovation.

A&P as a percent of sales was 7.3%, or approximately 100 basis points, or $2 million below prior year, primarily due to lapping of increased A&P support of the EcoAdvanced product launch in the prior year. For the full year, A&P as a percent of sales was within our targeted 6% to 7% range.

SG&A spending, excluding acquisition integration and spend cost in the quarter, was approximately $93 million or 21.5%, on a percent of sales basis, compared to $89 million, or 22.3% as a percent of sales in the prior year. The higher absolute dollar value was due to $3.9 million of additional SG&A related to the HandStands operations.

In the quarter, spinoff and spin restructuring related charges were $4.6 million. We have incurred approximately $16 million of spend and restructuring related charges for the full fiscal year. Acquisition and integration costs associated with the HandStands acquisition were $15.2 million in the fiscal quarter, of which $5.9 million was recorded within SG&A and $1.2 million was included in interest expense.

In addition, $8.1 million was recorded within the cost of goods sold related to the one-time accounting adjustment for the fair market value step up of acquired HandStands inventory. Pretax income was negatively impacted by the movement in foreign currencies by approximately $6 million in the fourth fiscal quarter, net of the hedge impact.

Moving to the balance sheet, we ended the quarter with $287 million in cash with greater than 95% of our cash held offshore. For the full year, we generated $167 million of free cash flow, driven by our strong operating performance, as well as improvements in working capital.

During the quarter, we've repurchase 233,000 shares for approximately $11 million. For the entire fiscal year, we have paid a total of $63 million in dividends and repurchased 833,000 shares for approximately $32 million. Our debt level in the quarter was approximately $1.05 billion, which equates to 3.1 times debt EBITDA on a trailing 12-month basis, inclusive with HandStands results.

I'd now like to turn our attention to our Outlook for FY17. As Alan mentioned, we are expecting adjusted earnings per share to be in the range of $2.55 to $2.75, inclusive of approximately $0.15 to $0.20 from the recently acquired HandStands business and based upon the following assumptions. Total reported net sales are expected to be up mid-single digits. Organic revenue in the base business is estimated to be flat to up low single digits. As material impact distribution and shelf space gains achieved throughout FY16 is expected to be partially offset by an anticipated a low single-digit decline in the overall category.

Incremental revenue from the HandStands acquisition is expected to increase net sales by approximately 5% to 6%. These gains are expected to be partially offset by approximately 0.5% to 1% negative impact from unfavorable currencies based upon recent currency rates. Our gross margin rate is expected to increase 50 to 100 basis points, driven primarily by productivity improvements.

SG&A excluding acquisition and integration expenses on a percent of sales basis is expected to be in the range of 19% to 20% representing an improvement of 50 to 100 basis points. Earnings before income taxes are expected to be negatively impacted by the movement in foreign currencies by $5 million to $10 million net of hedge impact based upon recent currency rates.

The income tax rate, excluding integration costs and other unusual items is expected to be in the range of 30% to 31%. In addition, we expect acquisition and integration costs of $5 million to $10 million related to HandStands. These costs are excluded from our adjusted earnings per share Outlook of $2.55 to $2.75. We've made good progress with our integration efforts and expect that the business will be fully integrated by the end of FY17.

Capital spending is expected to be in the range of $30 million to $35 million and depreciation and amortization is expected to be in the range of $40 million to $45 million, inclusive of the full-year impact of HandStands amortization. Free cash flow is expected to exceed $180 million.

Before turning call back over to Alan I would like to highlight certain prior-year comparisons that will impact next year's results. Overall, we are expecting more normalized comparisons, as we have fully comped the Venezuela deconsolidation and Go-to-market changes associated with the spinoff.

The first quarter of FY16 represents a challenging prior-year comparison as organic sales were up 9.5% due to a 3% favorable impact from the timing of holiday sales, which shifted from the fourth quarter of FY15 into the first quarter of FY16, a 3% benefit from the EcoAdvanced launch, and approximately 2% impact from the pull forward of sales into the first quarter, and approximately 1% impact from distribution and pricing gains. It is important to note that the pull forward of sales into last year's first quarter will impact this year's year-over-year comparison.

Last year's second-quarter organic sales were up 0.5% due to favorable impacts of winter storm volumes and the initial pipeline fill as a result of new distribution in certain US retail accounts. Both the third and fourth quarter included the full impact of distribution and shelf space gains, partially offset by the anticipated deload of retail inventories during the fourth quarter. In addition HandStands results were included for the full fourth fiscal quarter.

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

Thanks, Brian.

FY16 was a strong year for Energizer. Our colleagues executed in our strategic priorities, resulting in exceptional shareholder returns, and we're just getting started.

Our overall game plan remains the same. Our colleagues around the world will lead the charge by executing against our three strategic priorities of leading with innovation, operating with excellence, and driving productivity gains. That will allow us to create long-term value for our shareholders, our customers, and our consumers.

Driven by investments we have made in our business and acquisition of HandStands, we expect to deliver FY17 adjusted earnings per share in the range of $2.55 to $2.75, and free cash flow in excess of $180 million. This represents a sizable increase in both adjusted earnings per share and in free cash flow, compared to FY16.

I'm very proud of our colleagues and the results that we've been able to deliver in FY16, and I look forward to the coming year. We believe that we've created a foundation for continued success, we're excited about the opportunities ahead of us, and we remain focused on delivering value for our shareholders. This completes the prepared remarks and we will be happy to take your questions.

Operator, I'll turn it back over to you.

(Operator Instructions )

Bill Schmitz, Deutsche Bank.

Hi. Good morning.

Good morning, Bill.

Can you guys just first discuss the competitive environment? I know it's only one week, sorry, four weeks of data, but it seems like Duracell, some others have been seeing their promotional spending as a percentage of sales go down every month and it looks like it ticked up a little bit in the four weeks. Do you think that's indicative of anything? Then, how do you view the promotional activity of the holiday season? Did you book any hurricane-related sales in this quarter from the hurricane, I think it was on October 5 or something?

Yes. So Bill, it's Alan.

A couple of things real quick. First, on competition, you've heard me say this before: we believe that competitive activity in the category will continue. We have a very formidable competitor that we go against day to day. We don't anticipate that changing even under different ownership. I can tell you, from a promotional level, here's the way to think about it. You heard Brian and I talk about the 52-week period that we've seen both the depth and frequency down. As you look at the latest 13 weeks it's comparable to the prior year. It's very consistent with that; so we're not seeing any major significant changes in the level of promotional activity.

As it relates to the hurricane, the way to think about it is, Matthew generated about $6 million in incremental sales; Joaquin, which would be the comp from the prior year, was about $3 million so you probably seeing a net $3 million difference between the two, year over year, in the quarter.

This quarter or the fourth quarter?

In the fourth quarter.

Okay.

Excuse me. (multiple speakers)

In quarter one of 2017. In the fourth quarter, we were lapping hurricane Erika, had a little bit of her mean. It was a net down in the fourth fiscal quarter of about $2 million, but Alan mentioned in the coming quarter, quarter one of 2017, versus prior year, it will be about a $2 million to $3 million benefit.

Okay that's super helpful.

Then you have any sense for what the HandStands plan is going to look like for next year? I know you guys thought through it was pretty aggressive launch activity and that was going to blow over. Do you kind of have a sense of how that business lines up for next year?

Yes. So Bill, Alan again.

We are in the process of working with our customers in our joint business plans for back half 2017 and part of 2018. We won't see a lot of those types of programs being executed until the back half of 2017. That's the continued process were going through, keeping in mind that we just acquired in July, so we're going through that work now. We are very pleased with HandStands to this point. It's met our expectations. Obviously, in the fourth quarter, 8% contribution to sales, $32 million, $5 million in free cash flow and then the $0.05 EPS accretion we had talked about is right in line with what we communicated at the point of acquisition.

So we are very pleased with that. Integration is progressing nicely, it's in line with what we had hoped for, and in terms of your question on innovation, I can tell you that we've got a pretty reasonable pipe of innovation in auto fragrance for 2017. More to come on that in coming calls. I don't want to tip my hat too much at this point because of competitive reasons.

Okay.

Just to build on that, from a financial perspective, 2017 HandStands, about $0.15 to $0.20 is included in our overall EPS guidance and that's consistent with what we thought as we're going through the due diligence and as we previously communicated to shareholders.

Great. Thanks. That's super helpful; thanks for your time.

You bet.

Thank you.

Nik Modi, RBC Capital Markets.

Yes. Good morning, everyone.

Just a couple quick questions. Brian maybe you could update us on how the trade spending ROI initiative is going, the progress there? And what is actually being embedded in your guidance from that initiative in your 2017 numbers? Then the second question is on HandStands: just thinking about the global distribution potential of that brand or that business, and also extending it out of its existing auto aisle footprint into other aisles? Maybe you could give us some clarity on that as well.

Yes. The trade spend initiative continues to progress very well. As we talked earlier, we started in North America and we've already seen some benefits. We have executed the price increase in Canada. Our revenue management team helped develop that strategy and implement that in one of our top five markets in Canada.

Also looking really closely at how to optimize mix management. And we also went live with the new tool not to help analyze the effectiveness of our trade spend so that we could more quickly analyze those effective promotions that generates the highest ROI. We've trained our entire sales force on that tool in North America, and that will look to continue to roll out those efforts across the globe. The benefits of those actions go into our revenue outlook for the coming year, where the base business organic sales are projected to be flat to up low single digits, keeping in mind that we still operate in a category that's a flat to low single-digit decline. And so the efforts of that revenue management team and that trade spend project is embedded in our guidance.

Then, Nik, Alan.

I'll take the second part of your question regarding HandStands' global footprint and opportunities. Again we are in the throes right now of really focusing on North America where the bulk of the business is today. The joint business plans with our retail partners are in the final stages of being developed. Execution of those, again, in particular the new innovation, will be back half of 2017. Really flowing in where you're going to see the benefit of that is going to be 2018, and that is more the domestic view.

As you look international, we are working right now with, and meeting, as an example, with a lot of our distributors and our partners overseas, talking about the business, looking at what the current portfolio is, how we're going to leverage the innovation pipeline that's coming in 2017, and literally putting those plans into play now. I wouldn't expect anything from an international expansion front until 2018. You will see some impact in the 2017 plan residual on current international businesses we have, but expansion probably won't occur until 2018.

Great; and then M&A: just curious what you guys think of the landscape right now? Are there any interesting things out there that you have been looking at?

Yes, Nik, Alan again.

As I had mentioned in the last call, Brian, John, and I spent a lot of time looking at opportunities that exist in the household space. We continue to do that. We will aggressively continue to do that. As you know, and as I've been pretty consistent saying since Investor Day, it's one of the core tenets or alternatives we believe we're going to continue to deploy in terms of use of capital, and that will continue.

I can tell you that, as we go into post-holiday, we're going to continue those meetings and discussions to see what's out there. Keep in mind, it's really going to come down to whether or not the business has brands that we feel we can build. It's got a good defensible business model, we can leverage our core competencies; so think about those as our customer channel, and geographic overlap, the fact that we've got a great battery infrastructure and global footprint. The timing's got to be right, to be honest with you. Right now I want the organization to continue to remain focused both on the integration of HandStands and our core battery and lighting business. That has to be first priority.

We will balance any M&A considerations with other integration efforts that are going on or initiatives in investments that we prioritized in the business; and then, finally, looking at were multiples are today, it's got to be the right price. We want to make sure that we continue to maximize long-term value for our shareholders, so we're going to be very conscientious about the price that we pay for any potential target.

Perfect. Thanks, guys.

You bet. Thanks, Nik.

Wendy Nicholson, Citi Research.

Hi. Good morning.

Just following up on Bill's question about the hurricane activity, I know you said in the fourth quarter there were a couple points of expected headwinds from the inventory reductions, but would you summarize the current state of play, that retailer inventories are normal and where they're supposed to be, and so we don't have any more of it going forward? Or are they still elevated?

As you know, there was a load of inventory in Q1 2016. That inventory with those certain retailers has been worked down and at this point we feel inventory levels have returned to normalized levels.

Okay. Perfect; so we have the headwind that we're facing in the first quarter just lapping that comp, but other than that it's clean?

Yes.

Got it.

Then my second question, just the bigger picture: you're working capital levels are a lot lower than they used to be and that's fantastic. But they are still higher than some of the general, broader HPC peers; and given you're focused on cash flow, which is terrific, do you know a specific target of where you think you can get your working capital levels, I think percentage of sales over time?

Wendy, this is Brian.

From the start of the initiative back in 2011, where working capital percent of sales was north of 22%, now we're at about 10.4% as we end FY16. Made a lot of good progress in DSO; DSO is less than 30 days. BPO is near 70 days, and those are very comparable with a lot of the top performers within our peer group. Where we're still a bit of an outlier, it's days in inventory, and we ended the year of days of inventory, about 95 days; and that's still higher than what we like. It's always striking that right balance between making sure that we minimize the amount of cash we have tied up in inventory, while also making sure that we have the right amount of inventory in the right location to take advantage of being able to supply our retail partners with inventory in time of need. As an example, Hurricane Matthew, where we are able to provide customers and our retail partners that inventory during that emergency situation.

With all that said, we have not discussed externally a specific days in inventory target, but rest assured, it's something that we firmly believe is a lever to continue to drive consistent low to mid single-digit free cash flow growth year over year.

Bill Chapell, SunTrust.

Thanks. Good morning.

Good morning, Bill.

Alan, can you tell us a little bit -- I understand the evergreen target of the category in low single-digit decline, but obviously you didn't do that over the past year. And has there been anything, as you track devices, track in market, to make you think that maybe that's still too conservative, or maybe we've got more stabilization in the market? Or -- looking out with regards to your forecast.

Yes, Bill. Great question.

I'd say there might be a slight tweak to the forecast. Said another way, our outlook remains consistent for the category, but I would say probably flat to down low single digits. And let me give some background on why. Given the stability of category volume and value over the last year, year and a half, and what we're seeing in the device universe, so think about device ownership and usage, and the replacement rate of batteries in those devices is also relatively stable. We are seeing the emergence of the Internet of Things, even more at retail than we had when we first communicated that to the analyst community, and you're seeing the continued miniaturization of devices.

Given those things and the things that pulls up and down in the category, so think about those as storms, as what just happened with Matthew or winter storms. And then new innovation and technology that's brought to the category, those two types of situations have the propensity to increase or create comps within the category. Because of those more stable trends, we're probably looking at stable to down low single digits going forward.

And just to give a little bit of a snapshot what drives that, if you think regionally, in North America we're projecting the volumes will decline low single digits, value will trend slightly positive. Most of that's a result of the mix shift that continues to occur from price brands to premium performance in a particular specialty. In Latin America, we continue to see high inflation; we do anticipate volume will normalize there, though, as we cycle through the pricing actions that occurred in the past year. In Europe, Middle East, and Africa, Europe in particular, as you know there's very high private label penetration. We're expecting modest volume growth there and value flat to slightly down. Then, in Asia, the regional retail has continued to react to the entry of discount retailers through pricing and promotion. That's creating deflation in the category in the Aussie market, one of the larger markets in Asia. And as a result, it, combined with the balance of Asia, we are expecting some volume growth but value will likely lag.

I hope that provides a little more clarity on our call.

No. That's great.

One follow-up with regards to the US. I mean, your Nielsen (inaudible) data has been very strong. Over the years you had lost two or three sizable customers and they went exclusive with Duracell. Are we seeing you win back any of that business? Or is that just shelf space at existing retailers, existing customers?

No. It's a combination of both. You know I won't be able to address any specific customer. But as we thought about leading with innovation and operating with excellence, one of the core tenets behind that is quality distribution, visibility, availability, and really making sure we execute our shopper-based solutions with our retail partners. It's all part of our joint business planning that we do annually with them, typically a year out. A lot of what you're seeing in results today was because of the plans that we have put in place pre-spin, and some post-spin.

The way to think about it is, the distribution gains that we've seen are really a number of different things. They are new customers, by the way, around the globe, and regaining customers that perhaps were lost over the course of the last few years. Second is, we've been able to do a great job through the focus on in-store merchandising and execution of expanding our space. So there are several retailers when you look at them, we had existing distribution before, but the amount of shelf space and quality locations we have in those chains has gone up tremendously. Those two things combined, particularly in North America, are what are driving the share increases that you are seeing. We're very pleased with our current share. Again, you've heard me say I really don't want to go after rented share, promoted share; I really want the quality share. That [base] share is driven by those types of activities, such as merchandising, visibility, and distribution; and we're going to continue to go down that path.

Steve Powers, UBS.

Hey, great. Thanks.

Just to start, just to clean up some of the Q1 dynamics and isolating in on a holiday timing: I understand last year's Q1 benefited from shipment timing, but it sounds like only a small portion of that reversed this Q4 just ended. Is it fair to say maybe the holiday timing shipment drag in this coming Q1 is only about one point?

So last year, between quarter four and quarter one there were several moving parts. And you're right; there was about one point that shifted back into quarter four of 2016. It's also important to note, as we look forward to quarter one of 2017, quarter one of the prior year benefited from a pull-forward of sales, that retail inventory load that we talked about that didn't come out until the fourth quarter; there was about a two point headwind that is going to impact your year-over-year results.

Yes. That's fair. Okay.

Thank you, and then just going back to the earlier discussion on promotion. I know you portray things as fairly status quo, which is constructive, but the track data does potential imply some elevated promotional depth in the form of lower year-over-year price. Is that retailer-driven versus manufacturer driven? Or is there another way to read that data, because the pricing trends imply a bit more promotion than your comments did. So just trying to square that circle.

Yes. It's a great question. Most of what you're seeing in the data is going to be retailer-driven, other than innovation launches that may occur. So the example would be Energizer launching the EcoAdvanced, we are going to drive trial through promotion. We would expect that with any launch, so that would be one example. You may have another more trade-driven activity, with the retailers trying to drive larger packs with a manufacturer, or they may be closing out a certain brand or sub-segment, and as a result they aggressively price those. Again, that would be more of a blip that you would see within the promotional arena.

Then, lastly, you may have some customers that put a large pack item out there, as an example, to comp what's going on, on a new channel entrance, such as a discount retailer. As a result, they'll use that package in an aggressive price point to try and comp and limit the amount of share that, that new entrant obtains. In each one of those cases, what you're seeing is some decrease in AUP [in retailer] AUPs in the categories because of that. Again, those are not long-standing types of things; they sort of ebb and flow within the category. You would expect those to normally occur in any category; battery is no different.

Kevin Grundy, Jefferies.

Thanks. Good morning, guys.

Good morning.

Alan, I wanted to pick up on M&A, where it sounded like you're still aggressively looking at assets that are out there. But I guess on the other hand it seems like uncertainty and volatility will continue to be with us here at least in the near to intermediate term. A couple questions on this front: does the market volatility that we're seeing make you less apt to pursue larger assets? Should we be thinking more about tuck-in? Second, can you give us a range of size of assets that we could expect you to potentially transact on, should something of interest and sensible from a strategic fit present itself?

Yes, Kevin. Actually those are great questions, so let me kind of start.

Really, our criteria for M&A goes back to the four things I had mentioned a bit earlier in one of the previous questions. It's really about making sure that the timing, the business model, the type of category, the channels it's in, are all answered first. The pricing piece of it will come into play. At this point, regarding the volatility in the market, and our appetite for wanting to pursue M&A, we disconnect the two. We consider the economic conditions, but we disconnect them. For us, given our healthy balance sheet and our strategy to continue to diversify our overall portfolio but in a very disciplined and selective way, we're going to continue to look at things. We don't see that as limiting us.

In terms of size, as you saw with HandStands, that was a great first acquisition for us, a nice tuck-in, a good-sized business that is a great strategic, cultural, and operational fit. We're going to continue to look at businesses that may be similar in size to that; some may be larger. It's really going to come back to the criteria more than anything that we've set for this business and our overall M&A philosophy.

Brian, anything you'd like to add?

No, I think I you hit on it.

Thanks for that.

Just one quick follow-up, Brian, a housekeeping question on the tax rate. You are guiding that at 30% to 31% for FY17, I think post-spin; the longer term guide was 31% to 33%. So you're in the ballpark, but just what should we be thinking about beyond 2017 for the long-term tax rate for the company?

In the 30% to 31% range. We ended FY16 at 29.8%, I believe. So there is a slight uptick expected for 2017, and that's really a reflection of the full year of HandStands which is predominantly US-based in a higher tax rate in the US. So the right way to think about it going forward is about 30% to 31%.

Jason Gere, KeyBanc Capital Markets.

Okay. Thanks.

Hey, guys, the first question, I wanted to see if you could talk about the trends between online and off-line for battery sales? Just, I think, Amazon has been getting a lot of attention with the Basics, and a lot of the online battery sales are coming from them. I just wanted to get your perspective of what you're seeing for your brand in terms of that growth? And then, talking maybe about the merchandising with Amazon, how different it might be than when you just deal with the regular brick and mortar where they have their own private label out there?

Yes. Hi. It's Alan.

Jason, so let me start with, we believe that online e-commerce, the advent of Omnichannel, is not going to go away, it's going to be part of our business going forward. We have strategic plans in terms of how we work with traditional brick and mortar that are moving more towards Omnichannel so that they have an online presence. That's part of our joint business planning, so you would expect that to continue.

We also work with a pure play, so Amazon being an example, Amazon would be both a channel, a competitor, and a customer; they are really all three depending on which part of, or branch of, their business you're working with. They also have the advertising arm, as you are well aware of. Our expectation is that we will continue to work with Amazon in developing those types of program. But keep in mind, whatever we do there is typically going to be differentiated from what we do with our brick and mortar partners that have online programs. It's potentially a different audience and what Amazon is doing right now both in terms of driving their own sales and private label, is something that we certainly pay attention to and consider in our business model.

When you look at Amazon just in general, overall, online sales as a percent of total category sales is in the range of 2% to 4%. Amazon is certainly below 5% globally; it's more in that 3% to 3.5% range, so it's not a big percentage today. Now I will tell you, we do pay attention to that, and certainly want to be aware of how it fits into our overarching strategy, both as a channel that we want to sell through, distributors that we sell through that then sell to Amazon, and how we compete with AmazonBasics Private Label versus the Energizer brand and their portfolio.

Certainly on Amazon, AmazonBasics is the larger player. With -- I can't give you that number right now because that's not in public domain, but it is not as high as we had anticipated; and Energizer's is very close to that number in terms of share of total Amazon sales. So it's something we're going to continue to look at as we go forward given the trends that we're seeing in the business.

Okay and I -- thank you for the color there.

Just one other question about margin expansion, obviously a big step up this year; some of it, obviously we don't have Venezuela or go-to-market changes. So I think you're looking for somewhere between 100 or 200 basis points on margin expansion. I'm not sure if that includes A&P or not. The first question is, what should A&P be? Should that go up as a percentage of sales? Or is there more shifting there? Then secondly, how does that, this year, can you maybe put into color what the long-term model for margin expansion should be if we look over the next couple of years where it's more normalized?

So let me answer A&P; and, Brian, if you don't mind I'll hand that margin question over to you.

So consistent with what we've indicated since Investor Day, I'd like to see the A&P as a percentage of sales in the range of 6% to 7%; that's a very good range of us. Understand that will moderate, contingent on competitive activity or innovation launches that we have. It was certainly a little bit lower this fiscal year versus 2015 simply because we're lapping the launch of EcoAdvanced and the increased investments we've put there. But going forward we're looking at a range of 6% to 7% for A&P.

Then Brian on the margin?

And to break down the margin, first gross margin, we're guiding to 50 to 100 basis point improvement; that's really a reflection of the year-over-year productivity savings that our integrated supply chain team will drive. Then for overall operating margin that you're referring to, factoring in the full year of the HandStands results where their operating margin is also very high.

Jason English, Goldman Sachs.

Hey, guys. Thanks for the question.

A few quick housekeeping ones I think we can rattle off. First, on tax rate, have you guys assumed adoption of the [excess] tax benefits and stock comps in the guidance?

Yes.

Our math, about a $0.02 impact, so pretty minor? Is that about right?

Yes. It is pretty minor.

Perfect. Thank you.

And then, you lost a couple of retail customers a couple of years ago. You've picked up some distribution wins. Are both of those back in the fold?

We have distribution of one of those customers right now. You can see that at retail when you go look. Obviously, part of our fundamental approach is to continue to build our distribution, but we really want quality distribution. I can tell you that we continually engage in conversations with customers where we are not listed to see if we can possibly introduce our brands to their consumers and their stores and that will continue.

Okay. Good; so still more opportunity.

And then, back to margins real quick, it was a bit of a tough year for gross margins this year, and I know there were some headwinds like FX and you introduced more extensive products and different price to it. But you also had some deflation roll into the P&L. What are the drivers of the step-up as we look forward to a year of gross margin expansion? If you could walk us through the puts and takes? And real quick, mathematically, it looks like you may be assuming some price, whether that be in the form of lift or lower trade. In that margin build, is that right? Then lastly, on margins, given FX was a big drag, and given the volatility today, can you just remind us of a couple of the key cross currencies we need to keep in mind?

Let me try to unpack that.

The 2016 gross margin was down about 230 basis points versus the prior year. 180 of those was due to currency. About 60 basis points was due to severance or restructuring, as we've right sized headcount in certain manufacturing locations. And then we used productivity savings and some commodity favorability to really fund, on a full-year basis, the improvements and the investments that we made in innovation. Also, Venezuela was a 10 basis-point drag on the gross margin rate as well.

As we look forward to 2017, a 50 to 100 basis-point improvement, and it's really the return that we're generating from those productivity initiatives that we put in place throughout 2016. And you should think of year over year continuing to find ways to reduce cost and trying to find ways to continue to eke up that gross margin rate?

Then, Jason, your last question? On currency?

Yes.

Overall for currency, based upon recent rates, and I want to stress recent rates, the impact is a bit moderated. So if the sales line, I think it's 0.5% to 1% impact of the bottom line net of hedge impact $5 million to $10 million; it's probably at the upper end of that range. Very recently we've had a significant devaluation in Egypt that's impacted the year-over-year currency impact, so Egypt actually contributes about half of that headwind on a year-over-year basis.

Olivia Tong, Bank of America Merrill Lynch.

Great. Thank you.

I was wondering if you could talk a little bit about your holiday plans. You guys have obviously been bullish on that for some time. Can you talk a little bit more about, are you running more programs this year? And how they differ from prior years?

Hi, Olivia. It's Alan.

So this is the simplest way I can tee it up for you without getting into specific customers. As you walk the floors now, I think you are going to see greater presence of Energizer on the floor. A big part of what we had pushed for was incremental merchandising space and visibility in the stores. We do that through our shopper-based solutions. Those are actually [written] with our customers almost a year in advance of their execution. I think part one was really solid planning. We are seeing more merchandising in space in the stores again. It will be evident when you're outing and you see that yourself.

As we go forward, we're expecting that we're going to continue to execute in the stores relentlessly, so it's not just getting the product of the store. One of the things that we've done differently this year as well as our direct-to-retail merchandising team is spending more time in the stores executing against those display opportunities, making sure pegs are filled all the time, and making sure that when we have an opportunity to refill for repurposed display that we're doing that as well. So all in, as basic as it sounds, that's really what we're driving to continue to build our share profitably.

Got it. Thanks.

Then, in terms of the full-year outlook, how much of a factor is distribution gains? And also what do you assume in terms of underlying macros? Is there any change there?

Distribution gains are definitely factored into the full-year outlook, and if you hone in on the organic flat to up low single digits in a category that flat to low single digit decline, it's really reflects the carryover impact of those distribution and also those pricing gains. We talked earlier about how we've taken pricing in Canada. We've taken pricing in several markets across Latin America, Asia, and Europe as well. And all of that is included in those gains. If you look at our quarterly organic sales performance in 2016, really, those distribution gains started to play out in the tail end of quarter two, into quarter three, and then also quarter four.

William Reuter, Bank of America Merrill Lynch.

Good morning, guys.

Good morning.

You talked a little bit about the move to products online, and I know it's small at this point, but can you talk at all about how the profitability of your online customers compare in general to the profitability of brick and mortar?

Yes. It's a great question.

Bill, I hate to answer it this way, but that's something I can't respond to because we don't talk about specific customers, or our pricing and margin with them. Here's the way to think about it, though, is, the model's a little bit different in that a lot of what you're investing in with online is obviously the placement because it's more algorithmic, but also any advertising you may do. A lot of that is going to be more digital advertising, more viral, things that you are going to do with banner ads. So it's a much different model. The supply chain piece of it is certainly a little bit different than what we would see with a normal brick and mortar. We are also seeing that migration now into brick and mortar retailers that are moving more on the channel so that they got a presence both in store, online, or online ordering with pick up at the store, so it's a combination of those. And from a margin standpoint, again, I prefer not to answer that specifically, but needless to say, through our trade investment initiatives that we have in place and good joint business planning, our job is obviously to maximize margin for ourself and our retail partners by bringing value to the category and driving category growth.

Okay.

Then just a follow-up, I'm sure a lot of your biggest customers are in good financial health, but there is obviously a lot of challenges to the retail environment generally. I was wondering how much time and effort you guys spend keeping on top of your customers and their financial health? And how that impacts your plans or how you guys get paid from them?

Yes. We obviously, whether it be suppliers, our retail partners, agencies, all of that, we do a pretty thorough job at a senior management level of understanding financial disposition of our partners. That's very important to the model that we put in place, not only current quarter to quarter and full year, but future model. So that's an ongoing part of our management team process and evaluation that we do. So there's really, for us, there's usually no big surprises. We do try to work with our retail partners to make sure that whatever we do we're driving maximum value for them in the category, and that's really the primary focus.

And we stay on top of the aging receivables. It's something that I and my controller look at on a monthly and quarterly basis, and our credit teams, both in the Americas and also in international just do a terrific job of keeping on top of that.

Ladies and gentlemen, showing no further questions, I would like to turn the call back over to Alan Hoskins for any closing remarks.

Again, I just would like to thank everyone for joining us on the call today and for your continued interest in Energizer. Thank you very much. Thank you, Operator.

Ladies and gentlemen, the conference is now concluded; thank you for attending today's presentation. You may now disconnect.