Edgewell Personal Care Co (EPC) 2012 Q2 法說會逐字稿

Good morning. My name is Stacey and I will be your conference operator for today. I would like to welcome everyone to the Energizer Holdings Incorporated fiscal 2012 second quarter earnings results conference call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) As reminder, this call is being recorded. I would now like to turn the conference over to Jackie Burwitz, Vice President, Investor Relations. You may begin your conference.

Thank you, Stacey, and good morning, everyone. Thank you for joining us on Energizer's second quarter fiscal 2012 earnings conference call. With me this morning are Ward Klein, Chief Executive Officer; and Dan Sescleifer, Chief Financial Officer. This call is being recorded, and will be available for replay via our website, energizerholdings.com.

During our prepared comments, and the question-and-answer session that follows, we may make statements expressing the beliefs and expectations of Management regarding our future plans and performance, including future results or events, future earnings, investment or spending initiatives, future advertising and promotional spending, cost savings related to our restructuring and working capital projects, the impact of certain price increases, currency fluctuations, the impact of inflation, raw material and commodity costs, category value and future volume and sales, future plans for return of capital to shareholders, and future growth in our businesses. Any such statements are forward-looking statements, which reflect our current views with respect to future events, and are based on assumptions, and therefore are subject to risks and uncertainties.

These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different from those expressed or implied by our forward-looking statements. These risks and uncertainties include, without limitation, those described under the caption Risk Factors in our annual report on Form 10-K filed November 22, 2011. We do not undertake or plan to update these forward-looking statements, even though our situation may change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is shown in the press release issued earlier today, which is available in the Investor Relations section of our website, energizerholdings.com. Management believes these non-GAAP measures provide investors valuable information on the underlying growth trends of the business. With that, I will now turn the call over to Ward.

Good morning, and welcome to Energizer's second quarter fiscal 2012 earnings call. As you may have noticed from our three press releases this morning, we have a lot of news to report today. First, Dan Heinrich has been named to our Board of Directors. Many of you may know Mr. Heinrich, the retired Chief Financial Officer of Clorox. His extensive experience in the consumer products industry, and broad-based financial expertise will provide additional insight and perspective to our Board discussions. We are very pleased to have someone with Dan's background and financial expertise on our Board.

In addition, we also announced that our Board of Directors has authorized the initiation of a dividend program, the first in Energizer's 12-year existence as a publicly held Company. Dividends under this program are subject to a declaration of a dividend by the Board of Directors. Subject to this declaration, a quarterly dividend of $0.40 per share would be paid in September 2012, and implies an annual dividend rate of $1.60 per share. On an annual basis, this represents a cash outflow of over $100 million, resulting in a payout ratio of approximately 25% of our expected fiscal 2012 net earnings.

This level represents a payout ratio of 40% of the roughly $250 million per year of US cash flow that we generate, and we believe this is a prudent level at which to initiate such a policy. We believe that initiating a dividend at this level will be meaningful to our shareholders, and provide sufficient financial flexibility to continue making opportunistic share repurchases and bolt-on acquisitions. Accordingly, our Board has also approved a share repurchase authorization of 10 million shares. The decision to initiate a dividend, the payout level was given careful consideration. We listened to our share holders in order to better understand their view of Energizer, and how we can best deliver their value back to them.

As you know, capital allocation policy is an important element in delivering value, and historically, we have relied solely on opportunistic share repurchases in this regard. We believe that now is the appropriate time to augment our share buyback program with a dividend, in order to enhance the overall value delivered to our shareholders. This will provide an element of yield and certainty of return, which is highly valued by our investors today. Now, I will turn the call to Dan.

Thanks, Ward. Before reviewing the second quarter results, I'd like to first highlight an important internal initiative that is underway. Over the past year, we conducted a study to evaluate our net working capital levels, and identify opportunities for improvement. Historically, our working capital metrics have not compared favorably with many companies in our peer group.

There are a number of structural reasons why our working capital is higher than other HPC companies. Global versus domestic footprint, worldwide manufacturing centers of excellence versus local in-market production, and products such as batteries and sun care, which have highly seasonal demand patterns. Despite these structural reasons, we believe that there are opportunities to improve our working capital performance. However, there have been other priorities, such as major product launches, restructuring projects, and the integration of acquisitions where we have focused resources.

Now, with the launch of men's Hydro in a more mature stage, the 2011 restructuring of the battery manufacturing footprint mostly complete, and the integration of American Safety Razor almost complete, we believe that the time is right to place a higher priority of working capital improvement. We have identified opportunities to improve our working capital investment in all three major working capital categories -- day sales outstanding, days in inventory, and days payable outstanding. We have established the following targets as a result of our analysis; an improvement in working capital as a percent of net sales in excess of 400 basis points. Defined as trailing 12-month average of accounts receivable, plus inventory, minus accounts payable, over annualized net sales.

Based on fiscal 2011 totals, this would equate to a targeted working capital reduction in excess of $200 million. The steps needed to achieve the objectives in each working capital area are varied, but we anticipate immediate progress, and expect to have all necessary changes in place by the end of fiscal 2013, allowing us to see the full benefit on a trailing 12-month basis by the end of fiscal 2014. There will be investments required to achieve this improvement, but we do not believe that such investments will be operationally material.

We have also decided to make our financial statements more transparent so that our working capital levels can be more easily understood and monitored by investors. When you read our 10-Q filing, you will see that we have made certain balance sheet reclassifications that impact reported trade receivables, with equal and offsetting changes to other balance sheet items. The reclassifications are not part of the working capital improvement and cash savings noted, as they are just balance sheet location. We have adjusted our baseline measures to reflect this go-forward reporting methodology to ensure our targets are focused on real cash savings. We are in the early stages of this important initiative, and we will keep our investors and analysts apprised of our progress.

Now, on to second quarter results. Earnings per share were $1.17, versus $0.55 in the second quarter of fiscal 2011. Excluding unusual items, earnings per share were $1.22 in the second quarter of fiscal 2012, versus $1.04 in the second quarter of 2011. Net sales for the quarter increased $67 million, or over 6%, driven by organic growth in both personal care and household products. Gross margin for the quarter was up 140 basis points at 46.9%, due to favorable product mix and lower household products trades spending.

Advertising and promotion as a percent of net sales was up slightly, at 10.1%, versus 9.7% last year. A&P spending increased $11 million in the current quarter due to the new product launches in wet shave, and the timing of other A&P initiatives. Selling, general, and administrative expenses increased $15.4 million versus last year for second quarter, due to higher costs resulting from an increase in the underlying market value of certain unfunded deferred compensation liabilities, which was driven by the appreciation in the financial markets during the quarter, higher amortization stock awards, and higher actuarial pensioning expense, driven by lower market discount rates. Now, turning to divisional results.

In personal care, organic sales growth was a very strong 6.9%, driven by higher sales in wet shave, which increased 11%. The organic sales growth was driven by the launches of Schick Hydro Silk women's systems and Schick Hydro Power Select men's razors; higher Schick men's Hydro blade refill sales; lower promotional spending; and higher shipments of Edge and Skintimate. Legacy men's and women's systems sales declined as expected, and disposable sales were relatively flat, behind higher volume of Xtreme3 and Quattro disposable, which is mostly offset with higher promotional spend.

Outside of our wet shave segment, net sales in skin care increased 4% on significantly higher volume, due primarily to the timing of shipments in the early stages of the sun care season, partially offset by higher promotional and trade spending. Infant care sales decreased 11% due to category softness, heightened competitive activity, and timing of shipments. Sun care sales were relatively flat, as higher volumes were offset by higher promotional spending and unfavorable product mix.

Segment profit grew 3.6% operationally, reflecting higher gross margin on the wet shave sales growth, partially offset by increased A&P behind the launch of Schick Hydro Silk, and increased overhead spending. We expect A&P spending for the remainder of the year to increase as compared to the first half of 2012, most notably in the third quarter, when spending should be in line with the prior year quarter, due to the support of Schick Hydro Silk and Schick Hydro Power Select launches.

Turning to household products. Net sales increased 6% for the second fiscal quarter versus a year ago. Driven by the previously announced price increase in the US; the timing of shipments, as selected retailers increased inventory levels ahead of this price increase; and a comparably soft prior year quarter -- which included elevated retailer trade spending, which was not repeated in the second fiscal quarter of 2012. Segment profit for the quarter was $69.1 million, up $16.9 million, or 32.4% versus the same quarter last year. Operationally, segment profit improved $19 million, or 36.4%, due primarily to the top line gains noted above.

On a year-to-date basis, household products net sales decreased almost 1%, with about half of the impact due to unfavorable currencies. The organic sales decline of 0.4% was due primarily to a slow start to the fiscal year in the first quarter, as net sales were adversely impacted by a shift in the timing of holidays deliveries and the de-load of unused hurricane response inventories shipped in the prior year, in the US.

Segment profit for the six months increased approximately $2.4 million, or 1.2%. First quarter declines, due to top line softness, were offset by pricing gains and reduced retailer trade spending realized during the second quarter. With that overview of the quarter, I will now turn the call back over to Ward.

Thank you, Dan. Now, I will walk you through each of our businesses, and the key factors that are impacting them. In personal care, our key focus this quarter has been the launch of Schick Hydro Silk and Schick Hydro 5 Power Select for men. Schick Hydro Silk was launched in North America and Japan; and Power Select was launched in North America, Japan, Australia, and Taiwan. While we are still early in the launch of Hydro Silk, we are very pleased with the results to date. In-store execution has been excellent, due to strong support from our trade partners. Distribution is building, in line with our aggressive expectations, and the launch has been highly incremental to our women's business in the category this quarter.

We do, however, anticipate a fair share of cannibalization, as trial and repeat grow later in the fiscal year. Similarly, Schick Hydro 5 Power Select is off to a strong start in all markets where we've launched, and has helped drive incremental refill blade sales. For the Hydro franchise, refill volume sales continue to grow double-digit across all markets where we've launched. Consumer satisfaction continues to be very high, and consumers who try the product are converting at record rates.

While Hydro trends are positive, legacy men brands are under pressure, due to both anticipated cannibalization, and highly competitive activity in the category. For the quarter and year to date, the Hydro men's franchise has driven solid profitable growth, delivering the return on our 2011 investments as planned. At the same time, we are continuing to invest behind the brand to further drive trial awareness and conversion to refills through line extensions and effective advertising and promotion, which we believe will drive sales and profit growth going forward.

Our shave prep sales grew in the quarter, with solid shipment growth across all three major brands, Edge, Skintimate, and Hydro. Volume shipments increased this quarter behind strong promotional campaigns, including the Skintimate limited edition cross promotion with a Hydro Silk launch in the US, and a Hydro Gel cross promotion with the Power Select launch in Japan.

Moving on to other categories, we are well positioned in sun care, as the key consumption season nears. Due to Easter time and planogram changes, shipments shifted more into the second quarter this year versus last year. Initial consumption data on our new products, such as Hawaiian Tropics Silk Hydration and Banana Boat Cool Zone is encouraging, as is our early season market share. International sales also grew year over year across all areas.

In fem care, we unveiled new Playtex Play On advertising campaign, with three new sport ads in February. Sales were relatively stable, reflecting strong volume growth on our sport tampon brand, flat growth in the general glides, offset by higher promotional spending, and some unfavorable mix. The action plan we developed last year, including a new packaging re-stage and a new advertising campaign are being executed as planned, and are delivering the results we expected. While competitive activity has increased recently, we continue to support these brands. Finally, in infant care we experienced sales declines across all our product categories in the quarter. The category remains in decline behind macro-economic trends and lower birth rates. Competitive activity also remains heightened, new product launches and higher spend levels.

Turning to our household products division, we rebounded from a soft start to the year in the first quarter with strong second quarter performance. Net sales were up 6%, and non-operating profit was $16.9 million above prior year. These gains resulted in year-to-date operating profit increasing $2.4 million, or 1%. Although the overall household battery category continues to experience volume softness, we continue to see positive signs that overall category values are stabilizing. Category value was nearly flat versus a year ago, as a result of higher retail pricing and less promotional activity.

In North America, top line sales were strong, due to recent pricing actions, timing of shipments, increased inventory levels of selected retailers, and an overall soft prior-year quarter comparative. Top line gains flowed through to the bottom line, and drove most of the division's operating profit upside for the quarter. In addition, total category value improved versus year-ago levels, as the overall level of promotional spending decreased. Our previously announced 6.7% [increase on alkaline and carbons] (inaudible) has been successfully executed, and we have seen retail price points increase at key retailers, with category average unit prices up 9%. We did, however, experience a moderate share loss during the quarter. We understood that leading pricing could result in some share shifts. Nevertheless, we remain confident in our strategies.

Turning to Asia, we continue to experience top line softness in some of our key markets. Although our share position remains strong, our shipments have been negatively impacted by overall battery category declines in certain markets. In addition, the competitive environment continues to be fierce, which has led to some pricing declines. We anticipate that the balance of the year will be challenging in Asia, as we lap strong prior-year results, though we aim to return to our growth trajectory, as we leverage our very strong Energizer and Eveready brand equities to capitalize on overall favorable economic trends. We are in the best position to lead battery category growth across key Asian markets.

In Europe, top line results have stabilized. We have remained focused on reducing unprofitable promotional spending, and these efforts are beginning to positively impact the revenue lines. In addition, share growth in selected key markets has offset declines in other markets most negatively impacted by the economic crisis. Finally, trends in Latin America have remained relatively unchanged, so we are able to offset inflationary increases with pricing gains.

Looking forward, as noted in our release this morning, we will reaffirm our fiscal 2012 earnings guidance of $6 to $6.20 per share. We expect earnings per share for the third fiscal quarter to be lower than the prior year quarter, due primarily to the timing of advertising and promotional spending behind our new wet shave product launches, as well as some expected retail battery inventory de-load due this quarter to purchases made prior to the price increase that went into effect February 1. Now, Dan and I will be happy to take your questions. Operator?

(Operator Instructions)

Your first question comes from the line of Wendy Nicholson with Citi Research. Please proceed.

Hi, good morning.

Good morning, Wendy.

My question has to go to the conversation about working capital, which I think is so exciting, because I know for a long time you guys have been challenged on your relatively high levels of working capital. I wanted to ask, first of all, why now? Why the change? I think in the past you have been fairly defensive and straightforward about saying, hey, our working capital levels are where they are for a reason. So what's giving you the fresh perspective that, hey, there is this big opportunity for change? And along with that, as you, in particular on the inventory side, skinny down those inventory levels, Is there going to be inventory draw-down that affects your capacity utilization, and therefore your margins on any of the particular businesses over the next couple of quarters?

Let me maybe start answering that, and then turn it over to Dan, if I can, Wendy. From a timing point of view, we have been pretty transparent about our working capital position, probably worst in class, and we don't say that proudly. But we have other priorities before, especially over the last three years. And it may sound odd, but really the focus last year, in terms of both resizing the battery production footprint, along with nailing the launches of Hydro, along with integrating American Safety Razor, we just had a lot on our plate. And as each of those three activities somewhat abate, this is a project that we have been mindful of, and have wanted to tackle. And it's not that we are sitting on our hands. Dan and the team brought in some outside consultants with a fresh perspective on how we look at things, and really, I think, as a result of internal work and some of that external work, a pretty exciting opportunity is before us. And to that, I will turn it over to Dan.

Wendy, on your question about do we anticipate capacity utilization issues, I think no. You will see when we file the Q, which will be in the next couple of days, that we are bringing inventories down. We had increased those last year in anticipation of closing the manufacturing facility on the battery side. We just expect to keep those lower going forward. And I guess, to Ward's point about, now, the timing is best, simply because we don't have a product launch which is increasing our inventories, or a restructuring project; we also felt that it was very difficult for us, internally, to analyze what proper terms would be internationally, what our inventory days should be, internationally, as well, with our global footprint. So we brought somebody in who did some very prescriptive analysis, and looked really closely at a lot of what our peers are doing, and what was standard in the industry, and there were some good learnings out of that. We're putting those in place, and that is going to be part of the reason we are going to get the savings.

Is there more opportunity on the personal care side, or on the household side, just looking at working capital in totality?

I'm not sure there is that big of a difference between the two of them. There is an opportunity with sun care, because that's a highly seasonable business, and we have some promotional SKUs every year that we have opportunities. Batteries is highly seasonal, as well, so we have opportunities there. If you think about it, in markets outside of the US, we are really a combined commercial entity. So the opportunities with terms to customers are probably equal for both, and on the payables side, we are really centralizing that, and going to more of a global standard on payables. So I would say they are probably equal overall between the two.

Terrific. It sounds great. Thank you very much.

Thank you.

Your next question comes from the line of Chris Ferrara with BanK of America. Please proceed.

Good morning, guys.

Good morning, Chris.

I wanted to ask about battery pricing. You sound pretty good that the 6% to 7% price increase has been executed. Can you talk a little bit about, I guess, what looks like Rayovac's decision not to follow that, and they have talked, I guess, pretty aggressively in maybe even taking some share in WalMart. Can you confirm that, and flush that out a little bit, and what has been the impact, I guess, of that price brand not following relative to your total execution of pricing in the category?

Obviously, we don't ever talk about specific customers. In the case of Rayovac, and what they are doing on pricing, I revert back to you talking to them about what they are doing on pricing. As we've reiterated, we've successfully got the pricing through in all of our customers, and I mean all our customers. Duracell followed on all those customers, and so the two premium brands, which is typically 70% of the valued category, have implemented the price increase. We think it's the right thing for the category. We think it's the right thing even for our retail customers, those who care about same store sales growth and improving their gross margins. And obviously, it was done in response to the cost pressures we've been facing over the past 18 months. So we think it stuck. We are happy where it's at. What some of the smaller competitors are doing is something you really kind of need to talk to them about.

That's helpful. And I guess from the blades and razors perspective, I'm just wondering, does your guidance contemplate actions that P&G is kind of hinting at taking, that they gave on the last conference call, saying that, I guess, they think they are responding to what they see as unprecedented levels of promotion in the blades and razors category. How do you respond to that, and does your guidance contemplate that you are going see heightened competition from those guys in blades and razors?

When it comes to heightened competition, I think it's kind of our bread and butter in that category. I will say this. I was a little perplexed on some of the comments, and I guess for a couple of reasons. One, we just got done implementing a price increase in March on our razor and blade line of between 4% to 10%, including a price increase ranging from 3% to 7% on Hydro. So that price increase, which was announced, I think, this past December, we have implemented or done with in March. So the comments are kind of in face of that. In terms of promotional levels, and maybe that was where the concern was, our promotion levels in refills right now are down versus a year ago, from about 61% of volume on deal, down to 42%, and a lot of that is just the natural cadence, as you work off of the new product launch activity to more of an ongoing promotional approach, which you look at data, that's certainly what we have been doing. There is high some promotion activity going on right now on the new items, whether it's our Hydro Power Launch, or their trimmer kind of launch. But that's kind of the normal course of things. You'll see it, also, on Hydro Silk for women. But it's really kind of the natural curve of when you introduce a new product, a new SKU, and you spend a lot up front in terms of generating trial and awareness, and it tapers down over time. That tapering down over time is evident on the SKUs that we implemented this on the original Hydro launch. It is something that we are watching. They are obviously the 800 pound gorilla in the marketplace. It strikes us as a little bit odd, based on the facts I just shared with you, but we will be prepared to do what we have to do.

Thanks for the color.

Thank you.

Your next question comes from the line of Bill Chappell with Suntrust. Please proceed.

Good morning.

Good morning, Bill.

Can you maybe just give us a little more update on commodity pressures you are seeing now, and just how that has changed over the past few months. You've talked about price increases on the wet shave side. I didn't know if there was anything else driving those price increases, or if things are starting to look a little more steady.

Bill, this is Dan. We are really not seeing a whole lot on the commodity side. We've had some unfavorability within household through the first two quarters of about $8 million unfavorable, and we expect it to be relatively flat year remaining. And nothing of note on the personal care side.

And did you -- and I might have missed, kind of tell us what the headwind or tailwind on currency is for the remainder of the year, and how that's changed?

Yes. You know, it's been fairly negligible for the first few months. We are expecting it to be about $23 million. This is on segment profit level for both of the businesses for the latter half of the year.

And then finally, just kind of on the use of cash, all for the dividend and share repurchase, any reason why there was no share repurchase in the quarter, and then does this all kind of cite that you are really not as focused on acquisitions, unless something really opportunistic comes along?

You know, in terms of share repurchase in the quarter, again, as you know from our long term history, it's pretty much opportunistic, and so we just look at a lot of different factors, and those factors weren't calling for us to buy more shares this past 90 days, basically. And as for acquisitions, this gives us, still, plenty of dry powder, both for share repur -- the dividend. It still gives us plenty of dry power for opportunistic share repurchase, go-forward, but also for bolt-on acquisitions. I think, obviously, it would get more problematic if you were talking about something $1 billion-plus kind of range, but frankly, we're just not seeing anything out there. It's been fairly quiet in our space and the kind of properties we would want to look at. So from a bolt-on point of view, we still feel we'll have flexibility in that regard for the right deal, right country, right time.

Perfect. Thanks for the color.

Thank you.

(Operator Instructions)

Your next question comes from the line of Nik Modi with UBS. Please proceed.

Good morning, everyone.

Good morning, Nik.

Just a quick -- Ward, I know you didn't want to comment on specific customers and Rayovac, but I just want to make sure I have this right. My understanding is that they did follow in many retailers, just not one very large retailer. Is that true? And I just have a quick follow-up.

I, maybe, would characterize it as it looks like they have followed in some and not others.

Got you. Okay. Great. The second question, I guess, is more for Dan. Now that you have more bandwidth, and you are looking at this working capital, I just wonder if perhaps there are initiatives going on, or if you are looking at, maybe, areas to save more on the SG&A side, or other parts of your cost structure. If you can just provide any context there.

On SG&A, we really do always look at that, and I think one of the elements of our SG&A, which can be characterized as relatively high versus peers is domestic versus international footprint. So if you think of half of our sales are in the US, where we have two affiliates, so there is a lot of scaled benefits from that, and we have 48 affiliates outside of North America, which just have smaller footprints. They are justified. They are profitable, and it makes sense to have brick and mortar affiliates. But it's just a scale issue when you go internationally, and so just very roughly, within the US and Canada, it's about 10% of sales at the divisional levels, our SG&A, and when you get outside of North America, it's around 20%. Now, some of that is going to be high social costs in Europe, where it's just more expensive to do business, but a lot of it is just a scale factor with the sizes of the affiliates.

Great. Thanks.

Your next question comes from the line of Ali Dibadj with Bernstein. Please proceed.

Thank you. Hey, guys. Ward, I know you weren't a fan of a reporter who wrote a few weeks -- a few years ago, actually, by now, and others, pushing, calling for some changes in Energizer. But I've got to say, we really applaud a lot of the changes that you've made, so restructuring, the dividends, the buybacks, this reducing working capital piece, the new Board member, who is great, better communication, et cetera. But I guess you also know us by now, and we are always looking for a little bit more. I'm just trying to get a sense of two things in that context of improving what you do for shareholders. One is what your thoughts are on the progress of the dividend going forward. Are you believing that it should grow with earnings, keeping the payout ratio the same, or how do you think about that going forward? And secondly, if you see feminine care and infant care as best serving share holders as part of the Company, or as being sold outside of the Company.

Two good questions. On the dividend strategy, obviously we believe the dividend level that we have initiated is meaningful and a good starting point. And I think our focus as we are going forward will be kind of payout ratio of cash earnings. But we are not in a position, having just declared a dividend for the first time of our Company's history, really, to talk about, well, where is it going to go from here? So we are happy with where we are starting out, and obviously, a lot depends on a lot of factors going forward, both in terms of our net earnings growth, other uses of cash, being bolt-on acquisitions, share repurchases that are opportunistic. So we'd rather just leave what we have done as it is. And so on the second question, maybe I will let Dan -- well, fem care and infant care, they're not bad businesses. They are just not as big or as material to our overall portfolio.

In that sense, what is the best role for those businesses, from a shareholder point of view? Right now, they do generate positive earnings. They do generate positive cash flow. They do have pretty strong market share positions in the markets in which they compete. Fem care has had some challenges in the past, and based on what we are seeing, and the actions we have taken, it is improving, actually. Infant care, which actually held up quite well during the great recession, now is seeing some residual weakness, as birth rates have gone down, and there's low barriers to entry in that category, so there's some short term competitive activity. We are prepared to keep those businesses, and manage them for cash and earnings, and grow where appropriate. As with anything, you always look at your opportunities going forward. To do something else with them, you always have to value tax leakage and breakage. And in the end, it really is kind of a numerical exercise in what is the best value for share holders. Right now, the best value for shareholders is to manage them the way we are, and grow them as best we can.

That's real helpful color. Two quick just more housekeeping questions. One is if you can give us a sense -- maybe, Dan, this is for you, about what the impact was of sell-in on the quarter for batteries, both top line and bottom line. And the other was just a very quick clarification on your Q3 guidance, quote-unquote, being below last year. Is that on an adjusted basis or on a reported basis that it is going to be below last year? Thanks very much.

Ali, the second question, it's on an adjusted basis versus a year ago. And then on the sell-in, our estimate is that it's about $10 million of sales, and about $5 million of gross margin was the sell-in ahead of the price increase.

Thanks very much.

Thank you.

(Operator Instructions)

Your next question comes from the line of Alice Longley with Buckingham Research. Please proceed.

Good morning. My question is mainly on batteries as well. Can you tell us how much the battery category, you think, grew in value and volume terms in the US, Europe, and globally?

Yes, I can. Globally, I will start with maybe globally in terms of the battery category. And right now what we are seeing, based on our data, most recent 12 weeks, and this would be 12-week data, is globally, household batteries is basically flat, actually up 0.2% in terms of value. Units are down 2.2%, and if you break that out to the different areas, we kind of look at North America. In North America the value is up 1.7%. That will be both US and Canada, of course, and a lot of that being driven by over 2% value growth just in the US, based on all of the pricing initiatives we have taken over the past 18 months. Units are still down, but they are down, I think, around 8% or so for North America. A lot of that is we are just starting to now annualize out of that pack upsizing fiasco, which was heavily impacting on units. I think that will get to a more normalized level as we annualize through that. Asia, we've called out Asia the last couple of calls. The category, we are seeing the value actually down slightly, like 1%, units basically flat. That's unusual for Asia. We normally like to see value growth out of Asia. So that speaks to a few of the markets where we've seen some recent softness the past six months. Europe, obviously challenged, with value down. But interestingly, really only down about 0.5 point, and this, again, all 12-week value data. In Latin America, the markets we cover, we were showing up 1% in value. Kind of hit and miss. Not outrageous growth by any means, but certainly more healthy and stable than what we have seen over the past four years.

What do you think the unit growth for the industry in North America normalizes at?

I would hope flat. But to be realistic, maybe flat to down 2% would be an expectation. But it's based on a lot of factors.

Do we start seeing that when, in the June or September quarter?

Well, I think I would hope you start seeing you getting closer to that in the next couple of quarters, as we, like I said, annualize through the pack upsizing. That would be our expectation.

And then one other question, was there any forward buy-in blades ahead of the pricing there?

Not materially. Not as much as we think we saw in the battery side.

Thank you.

Thank you.

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

Hi, guys. Good morning.

Good morning, Bill.

Can you just give a little bit more granularity on the third quarter guidance? For instance, do you think sales will be -- reported sales will be down in the quarter, just because the comparison is a little bit tougher?

You know, Bill, I'm not sure we are going to give sales guidance. It's really more a function of there's just the higher A&P versus, really, the first two quarters of the year in support of the product launches in wet shave. And what's interesting is just kind of, maybe a little commentary on the phasing of A&P. Because for the full year, we expect to be below year-ago, because year-ago, as we've stated before, is the year of investment. But it's very much lower in Q1 and Q4. But when you look at Q2 and Q3, it's actually equal or above. It's really just bunching the A&P in the middle part of the year that's really driving what's going on in Q3.

Got you. So when you said that A&P was going to be flat, that wasn't just for the personal care business? That's a company-wide number.

That's just total. We basically -- the best comparison is, if you just look at Q3 in 2011, it's going to be really similar to that.

Ratio?

No, dollars.

Okay. Got you. That's very helpful. And then in terms of like the commodity, I know the question was already asked, but the commodity explosion in the back half of the year, it seems like zinc is still kind of rolling over. Why wouldn't there be a little bit of a commodity benefit as go through into the back half?

If you recall, especially with zinc, we have a hedging program, where we have the dollar cost average over 16 to 18 months, and what's really happened is just the spot prices and the average prices have really converged, just based with our hedging program versus what you are seeing in the market.

Okay. Got you. Thank you very much.

Your next question comes from the line of Jason Gere with RBC Capital Markets. Please proceed.

Thanks. Good morning. I guess it's like a culmination of some of the questions from before, but obviously, with the third quarter EPS down, you are setting yourself up again for the first quarter this year to be pretty significant, like over 30%, to kind of get to the midpoint of the range, and on top of 30% last year. I know you have kind of talked about some of the puts and takes here. Is it going to be the lower advertising, or do you see, really, the high, accelerating organic sales as really the driver that gets you there, the comfort level with keeping the guidance at $6 to $6.20? If you can maybe kind of sum it up with a lot of the short answers you have given before. How do you kind of get there, because it just seems, again, fourth quarter sets you up for another really strong comparison? Thanks.

You know, Jason, that's exactly right. And it really is not driven by top line sales. It's really driven by spending on the A&P line.

So when we think about the A&P, is it going to be down significantly versus the prior year? I think you were saying the full year would be 10.5%, so I'm just trying to think about that.

The most specific we want to get is on the full year guidance. We've reaffirmed $6 to $6.20 range. We did want to provide just some direction Q3 and Q4, and that's really all we are willing to do at this point, is that just lower in Q3 and higher in Q4, really driven by the A&P phasing.

Okay, and just lastly, would some of that be shifted again on the promotional side, maybe as a little bit more defensive, if your largest competitor does get a bit more aggressive, and you start to see a little bit of softness on the wet shaving side? Does that give you that cushion?

You know, I'm not sure I'd characterize it that way. What we are kind of sharing with you is really what our planned spending is, based on our new product launches, seasonality of our categories, the opportunities before us. And obviously, you tweak that weekly, monthly, and quarterly, based on the realities of the marketplace. But I think I would just leave it at that.

Okay. Great. Thank you.

Your next question comes from the line of Connie Maneaty with BMO Capital Markets. Please proceed.

Good morning.

Hi, Connie.

As I recall, in the 10-K that came out at the end of last fiscal year, for the first time, you gave what you thought was a long-term outlook for EPS growth, and if memory serves, it was mid-to-high single digits. What I'd like to know is, do you still believe that that is the most likely growth rate for the Company, given what could be a positive gross margin impact over the longer term from more efficient working capital?

Connie, I think what you are referring to is the proxy, where we talked about the comp plan, where we targeted 7% EPS growth. Because I don't believe we disclosed anything in the K. And yes, we expect to see some benefits, clearly, from the working capital program. Those are going to be one-time benefits. Those aren't recurring. Once we reduce the working capital, we intend to keep it there, but it's going to be a one-time impact. But I don't think we've provided any guidance on earnings growth. Not long term, for sure.

Great. Thanks.

Our final question comes from the line of John Faucher with JP Morgan. Please proceed.

Thanks. Just wanted to follow up a little bit on the dividend. When you talked about it earlier in the conference call, you talked about it both as a percentage of net earnings, but also as a percentage of free cash flow. And so you are talking about improving working capital, which again, is great. So as we look at that, should we track the dividend more on a traditional payout ratio versus net income, or are you looking at this as a percentage of free cash flow, and say if you have great working capital performance, you might consider potentially growing the dividend faster than net income? Thanks.

You know, obviously the working capital project, other opportunities to grow earnings faster than we planned all would play a part in future dividend payout decisions. But like I said earlier, we don't want to really speculate on that. I think, and I will turn it over to Dan, maybe, in a moment here. But I think one of the key other factors to consider is how much of our cash flow is US-based, versus how much is overseas? Because under current tax law, as you know, the overseas cash is trapped. So we have to look at what percent of US cash flow we think is a prudent amount to go into the dividend, along with the other opportunities we have before us. Again, share repurchase also having to come out of US cash flow, interest expense, and debt pay-down, mostly US debt comes out of US cash flow. So these are just some of the considerations as we set the limit.

The only thing to add to that is, John, it's really a function of payout. But if you look historically, our cash flow conversion has been fairly close to 100%, so cash flow and earnings for us, we are talking the same thing. But it's really payout would be the metric that we would focus on.

Okay. Then one quick follow-up here. You talked about the international versus domestic cash issue, and I apologize, if you had said this before, I didn't pick up on it. In terms of the working capital improvement, what percentage do you think is US, and what percentage is international?

I'm not sure we can answer that, other than about half our business is overseas, and half of it is here. (Multiple Speakers).

Okay. There is nothing you look overseas and you say, oh my God, we have got this massive working capital problem here.

No.

It's an opportunity across the entirety of the business.

It's more systematic.

Great. Thanks a lot.

Thank you.

That was our final question. I will now turn the call back over to Ward Klein for closing comments.

We'd just like to thank everyone for joining us today, and I think that concludes our call. Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.