Edgewell Personal Care Co (EPC) 2013 Q2 法說會逐字稿

Good morning. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the Energizer Holdings Incorporated second quarter results conference call. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Thanks Patrick, and good morning everyone. Thanks for joining us on Energizer's second fiscal quarter earnings conference call. With me this morning are Ward Klein, Chief Executive Officer and Dan Sesleifer, Chief Financial Officer. This call is being recorded, and will be available for replay the our website, www.energizerholdings.com. During our prepared comments and the question-and-answer session that follows, we may make statements expressing the expectations of management regarding our future plans and performance, including future sales, earnings, earnings per share, capital expenditures, advertising and promotional spending, product launches, the amount and timing of savings and costs related to restructurings and other initiatives, the amount and timing of changes to our working capital metrics, the impact of price increases, currency fluctuations, tax rates, raw materials and commodity costs, category value, 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. These statements are based on assumptions and are subject to risk and uncertainties, including those described under the caption Risk Factors in our annual report on form 10-K, filed November 20, 2012. These risk and uncertainties may cause our actual results to be materially different from those expressed or implied by our forward-looking statements. We do not undertake to update these forward-looking statements, even though our situation may change, and these forward-looking statements represent our views as of today only.

During this call, we will refer 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 trends of the business. With that, I would now like to turn the call over to Dan for a review of the quarter.

Thanks, Jackie. For the second quarter of fiscal 2013, adjusted net earnings per diluted share increased $0.58, or 48%, to $1.80. Organic sales were essentially flat in the quarter, with an increase in Personal Care topline results, offset by a decline in Household Products. With sales flat, the year over year increase in adjusted earnings per share was primarily due to improved margins across both divisions. Adjusted net earnings, excluding unusuals, were up $32.8 million, or 41%, while shares outstanding were 3.4 million lower in the quarter, versus the prior year quarter.

Turning to division results, in Personal Care, organic sales increased 1.3% versus the prior year quarter. This result was below expectations, due in part due to declining dollar trends in our US measured categories, down 2.3% in the latest 12-week period, as compared to up 1.1% in the latest 52 weeks. Wet shave organic sales declined approximately 1%, primarily due to a year ago pipeline fill if Hydro Power and Hydro Silk, and the weak category trends, which were partially offset by the launch of Hydro Disposables in North America. We began to ramp up distribution of the Axe Shick co-branded product launch, and expect to achieve full distribution during the third fiscal quarter. This launch did not have a meaningful impact in the March quarter.

Internationally, we posted strong organic growth in mens and disposables, driven by promotional programs, especially in Asia. Finally, shave prep sales were down 8%, due to increased discounting and promotional activity by competitors. In our other personal care categories, organic sales increased 5% for the quarter. Global skin care sales were up 8%, despite difficult comparatives from the prior year quarter, on strong volumes and favorable price mix. Growth was particularly strong in the US, despite slow category trends early in the sun care season, which only represents a small portion of total annual US consumption.

Within infant care, sales increased 3%, driven by Diaper Genie distribution gains and increased pail sales, as we continued to invest behind trial for this product line. Finally, these gains were partially offset by declines in feminine care, which declined 6%, due in part to a competitive new product launch and the timing of our promotional programs. Segment profit increased 10% for the quarter, driven primarily by higher sales and lower overhead spending. For Household Products, organic sales decreased 1%, due primarily to the continued decline in category unit volumes, which was partially offset by favorable pricing in the US. We have now passed the one-year anniversary of the price increase in the US.

Volumes declined in North America and Europe, but these declines were partially offset by organic growth in Asia and Latin America. Household Products operating profit increased $31.8 million, or 46%, driven by favorable product costs, lower A&P spending, and reduced overheads. These results include benefits realized in the early stages of our restructuring efforts. Now, I would like to provide a little bit more insight on a couple of key line items on the consolidated P&L.

Advertising and promotion spending was down $9.2 million in the quarter, primarily due to lower spending in Household Products, as a result of the timing of promotions that has shifted to the back half of the year. Total selling, general, and administration expenses were down -- were lower by $22.3 million, equating to a 190 basis point reduction as a percent of net sales. This reduction reflects effective spending controls, and the favorable impact of the early stages of our restructuring initiatives. In the second quarter, we realized $15.4 million of savings related to the 2013 restructuring initiative, the majority of which was recognized in the Household Products P&L.

For the second quarter, our overall effective income tax rate was 25%. However, this rate was favorably impacted by approximately 3 percentage points, due to the retroactive reinstatement of the R&D tax credit as part of the recently passed tax legislation, and certain favorable prior year foreign tax adjustments. For the remainder of fiscal 2013, we estimate that our effective tax rate, excluding unusuals, will be approximately 30%. During the second fiscal quarter, we continued to make progress on our working capital initiative, achieving a 270 basis point reduction from the baseline working capital level of 22.9% at the end of fiscal 2011. We are six quarters into this initiative, and on track to achieve the targeted reduction of 400 basis points by the end of fiscal 2014. To date, we have realized progress in all three areas, days payable outstanding, days sales outstanding, and days of inventory. With that overview of the quarter, I will now turn the call over to Ward.

Thank you, Dan. I think one of the most noteworthy observations from this past quarter is that in the Personal Care categories in which we compete, category dollars declined 2.3% in the quarter versus category growth of 6% in the prior year quarter, and growth of 1.6% in the December quarter. The decline in the current year quarter accelerated in the most recent four-week data. For example, the total US razor and blade market declined 0.2% this past 12 weeks, versus an increase of 6.3% in the year ago quarter, and a 52-week growth trend of 1.7%. This significant slowdown in the razor and blade category growth was most pronounced in men's systems, where category value was actually down 3.6% in the most recent quarter.

This deflation of the US razor and blade category seems in part due to hyper levels of promotional spending by our leading competitor. For example, according to measured market data, their percent of units sold on promotion this past quarter rose over 500 basis points on men's systems, and rose 470 basis points on women's systems. In contrast, Shick's percent of volume on-deal actually declined for the quarter. Despite these trends, we held our men's system market share behind continued growth in Hydro. In addition, by our estimation, our competitors total A&P spend rate against razors and blades during the last nine months has increased measurably, with no material benefit to category growth, or relative market share positions.

We remain confident that we will continue to benefit from our focus on introducing innovation, as noted with the recent expansion of the Hydro franchise into men's and women's disposables, as well as the Axe Shick co-branded wet shave launch. Turning to shave preps, the category's down 2.5 points, and Personal Care share was also down 1 point. Competitive pressures in this category also remained intense. Competitive spending spillover from razors and blades, as evidence in the significant increase in promotional spending in preps, seem to be also putting into deflationary pressure on this category. The unusually cold wet weather in the United States negatively impacted the sun care category, which was down 18% for the quarter.

Personal Care showed a modest share gain, driven by Banana Boat. Currently, 7 of our new products our in the top 20 new item ranking report, with 3 of them making the top 10. International sun care continues to be a strong growth story for us, growing double digits in Asia and Europe this quarter, and contributing to overall sun care net sales growth of 9%. Finally, Litter Genie continues to gain traction behind advertising and strong consumer acceptance. This product has had an extremely positive response, resulting in improved shelf presence. Repeat rates continue to exceed our goals for refills-to-pail ratios. We still have an opportunity to gain additional distribution, and accelerate pail trail, and will continue to support this exciting new innovation with ongoing media and promotional campaigns.

Turning to Household Products, global consumption trends remain consistent, with volume down 2% and value down 1%. Value trends have tracked above volume trends this past year, driven by the retail price increase in the United States last year, and by inflation in Latin America. The US began to comp the retail price increases in the March quarter, and as a result, the value trends are expected to more closely align with volume trends going forward. Given these category dynamics, competitive activity has escalated, and as a result we have experienced both gains and losses in distribution. While we have regained shelf space at a major retailer, we were recently notified of distribution losses elsewhere.

In the near-term, we projected net loss of market share and a decline in net sales in the fourth quarter of fiscal 2013. We will look to offset these losses through distribution and market share gains, driven by our two strong brands and our full product portfolio. These shelf space shifts are an indicator of the challenging competitive environment in the battery category. And we expect that such activity will continue, resulting in increased volatility in sales and market share for battery manufacturers and rising cost of doing business. We entered fiscal 2013 with a focus on the rationalization and streamlining of our cost structure to improve our competitiveness, given this environment. The escalating competitive environment underscores the importance of our restructuring efforts.

I will cover the progress of the restructuring project in a few minutes, but I did want to cover a few recent category and market share trends to provide more context to the quarterly results. The North American battery sales declined in the low single digits, consistent with expected trends, driven by lower volume, partially offset by favorable price mix, mostly due to the February 2012 price increase. In Asia Pacific, we grew net sales by mid-single digits, and grew share by 4 points to 65%, based on incremental shipments and consumption, as we significantly increased distribution in the key retailers. Overall, the category volume remains flat to slightly negative, while category value was down 3%.

In Europe, Middle East-Africa, sales declined in the mid-single digits, due to timing of distribution shipments, mostly in the Middle East-Africa, as well as category declines in Western Europe. In Europe, the category was down approximately 2.6% in value. [Our] market share remains relatively stable. Finally, in Latin America our sales increased low single digits on higher volumes across several markets. Category value increased by 9%, while volumes were essentially flat. Our market share was up slightly, to 43%.

Now, turning to the update of our 2013 restructuring program. Significant progress has been made with our restructuring efforts. The organization has embraced the changes, and we are building positive momentum across all of the savings initiatives. Implementation of these plans is ahead of our original assumptions, and savings have started to be realized. As a result, we have revised our fiscal year 2013 gross savings estimates to $50 million to $60 million from the original estimates of $25 million to $35 million. We have also revise the total gross savings estimated for the restructuring project to $225 million, an increase of an additional $25 million of gross savings, as a result of identification of additional opportunities.

As previously noted, we plan to reinvest a portion of our savings, to provide the operating flexibility needed to invest in our businesses, grow our brands, and help accelerate innovation efforts, which we believe our critical, to ensuring long-term sustainable growth. The increased savings opportunities will provide additional flexibility to meet our goals as we continue to estimate that $150 million of the $225 million estimated gross savings, will be used to improve profitability. Thus far, over 700 positions, or nearly 0.5 of our targeted headcount reductions, have been eliminated. We initially focused on organization realignment in non-plant locations across North America. The timing of manufacturing footprint changes remains on schedule, with facility closures expected through the balance of this calendar year. In addition, changes within our international markets are planned to be implemented, again throughout the balance of the calendar year.

In addition, procurement initiatives are progressing well. We continue to work with our suppliers to identify and eliminate non-value-added waste and cost in targeted areas. We are successfully implementing our announced restructuring plans, and will continue to challenge the organization to search for additional opportunities. In addition to the progress being made in our restructuring activities, as Dan mentioned, we continue to make substantial progress in our working capital initiative, with working capital as a percent of sales down 270 basis points versus the 2011 base level. As noted in the release, we are reaffirming our financial outlook of $6.75 to $7.00 for fiscal 2013. Before making my concluding comments and opening the call up to questions, we believe it is appropriate to provide further insight into our outlook for the remainder of fiscal 2013 so you can better understand how we see the remainder of the year playing out.

By reaffirming our outlook for fiscal 2013 of $6.75 to $7 per adjusted earnings per share, we are forecasting to $2.75 to $3 for the back half of the current year, as compared to $2.94 in the back half of last year. We have provided insight into several areas, but to summarize, included in our range for the back half of the current fiscal year are the following. Personal Care organic sales growth of 3% to 5%, Household Products organic sales declines of 3% to 5%, continued realization of restructuring savings, and increased investment spending to support our brands. Other items included in our year remaining outlook are a benefit from lower shares outstanding versus a year ago, which we anticipate will be offset by increased year over year tax rates in the back half of the year. And lastly, we anticipate that currencies and interest expense will be modestly unfavorable.

We have covered a lot of ground in our prepared comments, so I would like to leave you with three key takeaways. First, it is a very challenging environment across many of our categories. Second, our restructuring efforts and cost savings initiatives are working well. And third, we remain intensely committed to investing in our brands and growing for the long-term. We will now be happy to take your questions. Operator, can you please open up the lines?

(Operator Instructions)

We do ask, in the interest of time, that you limit yourself to one initial question and one follow-up question. Dara Mohsenian, Morgan Stanley.

Good morning. So from a topline standpoint, clearly you highlighted the difficult competitive situation on the Personal Care side, as well as in batteries, which I guess is more related to distribution. But can you give us more detail on how much the environment is deteriorated here, and more importantly, do you think this is more of a short-term phenomenon, or could it continue into next year? And also, how much visibility do you have that the higher A&P spending will help solve some of the market share issues here? Or do think you may need to make some price adjustments at some point?

Okay, all good questions. I think first on the categories, I think, as we've said in our comments, that the bit of a surprise which just weakness in the Personal Care categories, many of the categories in which we compete in. The sun care, I think is self-evident based on the sort of spring US is having. So I'll put that aside. And I think more on kind of the overall razor and blade market, the softness in the categories is, I think, softer than we were expecting. We do think that the hyperactivity that's taking place in the categories leading to the deflation of that category, and to try to predict where that will go is probably not a worthwhile exercise.

I think from an A&P point of view, our A&P spending plans all along have planned for higher A&P in the back half of the year versus the first half of the year. A lot of that higher A&P already planned, and to be implemented was tied into the innovation that we've talked about, that is really kind of back-half year loaded, and is underway as planned. And so, as we move forward, I think the good news from our perspective is that the cost savings that we're reaping out of this transformers project has given us even more flexibility, operating flexibility, as it relates to our spending plans as we move forward. And that's why we identified the additional, I mean, the $25 million of restructuring savings that the organization is committed to, but really we're putting all of the into A& P to support our brands, given the competitive environment.

Okay, and can you give us some sense for how severe the level of competitive pressure is? Because we'd already seen it ramp up over the last few quarters here, and now we have another layer on top of that. So, it seems like it's pretty severe, but I was hoping you could put it in context, maybe versus longer-term trends in these categories?

It has been hyper for probably the last three quarters. So I'm not sure I'd layer on top of the past couple of quarters. It's just a continuation of what, really, we've been seen since the middle of last year. And like I said, I think the disappointing part of that is you see all the traditional promotional spending going on, which is not leading to category growth, and I think leading to just the opposite, and frankly, is not leading to real material share changes. I mean, someone may be up or down 50 basis points, but there's not a real major share run going on right now. I mean our Hydro, our share continues to be growing in the face of that, and of course that's where our focus has been.

Bill Schmitz, Deutsche Bank.

Hi, good morning.

Good morning, Bill.

Hey, could you just give us some more color on the distribution changes in batteries? I mean, I think we know who the big customers is. But can you just say what channel you are losing in, and sort of the order of magnitude of the puts and takes from the two?

Yes. As usual, I won't get into customer-specific comments. It's just, we don't do that. I think overall I'd characterize, you look at the last couple of quarters. Last quarter I think we had more distribution gains than losses, frankly. I think this quarter that we finished, I would still say we probably came out on the positive side from a distribution point of view of gains versus losses. I think some recent events indicate that we can probably expect maybe a few more distribution losses than gains at the back half of this year. So it's kind of the cadence of the battery business. These things ebb and flow. That's kind of how it's ebbed and flowed over the past nine months. And, I think that process will continue.

Okay, great. And then can you -- how did the quarter come in relative to your internal expectations? And then maybe, is there any risk that you're going to get some pressure from retailers to roll back some of the pricing? Because if you look at other companies that have reported so far, there's pretty significant gross margin gains. So are you seeing any economic pressure from some of the retailers to maybe deal back, or even roll back pricing?

On your latter part of your question, I'd say no. Like I said, given the level of competition that exist in many of these markets, it's -- and especially in promotional spending, advertising spending, obviously pricing per se is part of that, but I think everyone respects that there's a lot of competition already out there, and so to roll back pricing, there's no undue pressure from any retailer to do that. It's, from the gross margin point of view, really a lot of that gross margin improvement you're seeing for us is due to the cost savings we're achieving, more than to any sort of pricing we're taking.

So I don't feel our pricing is out of line. And as to your first part of your question, in terms of just how the quarter came out versus our expectations, I would say on the downside, we're disappointed in the lack of growth in the Personal Care categories in which we compete. That would be kind of a little downside surprise versus our expectations. That's more than offset by our progress on our restructuring and working capital initiatives, which I think have just been outstanding in terms of how that program is progressing, and obviously it plays a big part in what is a very strong, frankly earnings report for the quarter.

Wendy Nicholson, Citi Research.

Hi. I know you said that Axe's selling with very small in the second quarter, but can you talk about sort of dimensionally how big will it be in the third quarter? Maybe just try to help us get comfortable with the guidance for that 3% to 5% overall Personal Care growth in the back half? And then a second question, if you don't mind. Is the working capital, you're making fabulous progress there, but I can't help believe -- but believe that there isn't more room go, even after you get the 400 basis points of improvement. So is that something that maybe we can look for, or am I just too early in that? Thanks.

First on Axe. Again, that's really a product launch, really a test, and one very important customer. So I don't really want to get into details on that. We're preceding forward on that exciting launch in tandem with Unilever and with that customer, and are implementing accordingly. As it relates to the organic growth and heightened A&P spending on Personal Care for the back half, certainly that is part of that, but there is many innovations coming out. So there's many contributors to both the organic growth number that we've given and the A& P that we expect. As for working capital beyond 400 basis points, we like to think so. We'd like to get the 400 basis points under our belt first, and we're well on our way, as you can see on doing that. But as we get better in terms of managing our working capital, I would hope to think that after 400 basis points, we uncover even additional opportunities. But we're just not really -- we will get to the 400 basis points first, I think.

John Faucher, JP Morgan.

Thank you, good morning. Want to talk a little bit about the sun care business. And I get the whole issue of a weak start. We've seen this in a number of different categories across multiple companies. But I just want to say, you highlighted growth in sun care as one of the reasons for growth in Personal Care in the quarter. And so I'm just wondering what we saw in terms of the cadence of the shipments and how much we should need to think about that business negatively impacting organic revenues in Personal Care over the back half of the year?

I'm not sure I can dissect down to quite that level of detail that you're asking for. So maybe just a general comment. Obviously, sun care is a weak start as a category in terms of offtake at retailers because of the weather. Our shipments have been strong. Again, a lot of that strength this quarter, it's a low quarter, frankly for sun care, and a fair amount of the growth that we are seeing is actually outside the United States. And as many of you are aware, the sun care business, we've been growing the sun care business internationally double digit, year after year ever since we acquired Playtex back in '07. So after that many years of double-digit growth, our sun care international business is actually starting to be kind of material to our total sun care segment. So the good news there is that you kind of balance off your weather risk, so to speak. So we're seeing a fairly significant downturn in the category in the US, but nevertheless, we're able to offset that with some of the international growth.

Just add to that, John, sun care was up 8% to 9%. So it actually was very good versus a year ago. We just had much higher expectations. And really, if you look at what the category did, down almost 20%, it was really a category-driven, weather-driven issue. So it was up, but again below what we expected.

And I guess my final comment on sun care is, you are going to have higher variability in this business than most businesses, because of the seasonality and that dependence on weather, but in terms of long-term trends, we continue to be very bullish on sun care being on trend in terms of aging Baby Boomers, awareness of skin cancer, and increased usage opportunities that exist on people protecting themselves.

Okay. Great. So basically what it sounds like is, it wasn't something where shipments moved out of the back half and into the first half. It was just more of an offtake issue, and the results that you put up this quarter were sort of real results from that standpoint?

Yes. I mean, the results we put up are our shipment, obviously. And they're, as Dan just outlined, fairly strong. The down 18% is retail offtake, and that obviously reflecting the weather.

Ali Dibadj, Bernstein.

So as I think back, one of the concerns we and others had coming out of Analyst Day was whether you're investing, or you were anticipating to invest, enough to keep your market shares to grow in your categories, given competition, given category dynamics, et cetera. So now it seems like with this extra $25 million, that that fear has kind of come true. And I want to ask around, how do you think about whether that number is enough going forward? So how do you think about that internally, why do you think it's enough? And then also, it's great that it's come out of incremental savings. So how much more do you think incremental savings do you have in the business to cover, if there's any more of this type of pressure?

On the latter part of your question, Ali, I would say right now we've committed to $225 million in gross savings, and we feel pretty comfortable about that. Whether there is more than that, I would like to think so. I think the organization's working very hard as they proceed on this project to uncover more. Whether that would go to the bottom line or to further A& P spending is speculative, so I don't really want to go there right now. But we have identified that of that $225 million, $75 million is going to into the businesses. So the way we've talked about that in the past, as you know, is taking kind of a general spend for the total Company from 10% to 11%, and with that additional $25 million it is reasonable to think that we're starting to target for total A&P spend as a percent of sales little bit over 11%.

How or why we think that's enough, that's a judgment call quarter by quarter, based on what's going on by competition. I will say this. We can never outspend our competition in some of our categories, nor would we ever try to, or is that realistic. And what to me is surprising is the enormous amount of spend that our competition has put into some of these categories, and the negative impact it has had on the categories, and the de minimis impact it's had on market shares. So money doesn't buy everything, and I think in the end, it's the best innovation that wins. And I continue to think that's where our focus should be, and that's where our focus will remain.

Okay, and then -- and that's helpful. I just to follow-up on that a little bit. I think there is anticipation that some of this pressure continues for a while, certainly among some investors, certainly among us. So how should we think about kind of the go-forward in terms of your cash use in that context? So does it become more likely that you might want to buy something to get scale in some of these categories, sun care as an example? Or do you actually say, look, we're not really as growthy as we were before, so we do have to give even more of the dividend, or buy back more stock. So is there a shift at all as you think about, certainly, long-term Battery growth, long-term Personal Care growth? You've already shifted your stance a little while ago in Household Care growth to be more negative. How should we think about those shifts, and then the shifts that you may be making, as a corollary to that, for your cash use going forward?

I don't think -- you know us well enough to know kind of our preference use of cash historically, share repurchase, and then more recently implementation of a dividend, and then on top of that, acquisitions that makes sense for us. And those remain the three uses of cash, and do we get it back to shareholders, or do we see an investment opportunity that we think is going to be immediately accretive for, and in the benefit of long-term shareholders? That dynamic doesn't change. Acquisition opportunities come and go. We evaluate a lot, we move on very few. I don't think that changes.

To get scale in the categories in which we're in, as you know, we're really number one or number two in most every category we are in already. Nevertheless, we'll look at both on opportunities when they come along. And for us, really, the new part of that three-part equation is kind of the dividend side, and we're in our first year still of paying out a quarterly dividend. And we'll then reassess dividend policy when the Board is ready to hear on the next quarter or two, to see if there should be any changes or enhancements to that. But I think, obviously, all three will play a role in terms of how we use our cash, again just focusing on what's the best opportunity to improve shareholder value.

Bill Chappell, SunTrust.

Good morning. Just previously on shave preps, I mean, I think we've seen or understood the pressure in kind of the wet shave category, but shave prep seems to be a little bit new. Now, is that just a complement of the promotional of kind of packages or bundling with the wet shave in terms of doing promotions, and that's why it's down, or is there something else going on?

I think, as I said in my comments, I really do think it's really kind of spillover out of going on in razors and blades. When a competitor doubles the number of FSI's, for example, against you in razors and blades, oftentimes that will be packaged with shave prep coupons and/or promotions with shave preps. You're seeing the increased promotional activity in shave preps, as well as razors and blades. And just as that hypercompetitive activity has lowered the value of the men's systems categories 3.5%, 4% this quarter, we're seeing 2% to 3% deflation in shave prep category. So I think it is mostly promotion-related, and kind of a spillover, what's going on in razors and blades.

Okay, and then switching just kind of to the understanding your full year guidance. I mean, I guess the biggest question mark was gross margin, in that it was so strong year-over-year this quarter, and just trying to understand why that improvement will moderate. I mean, Is there -- are there major investments in terms of promotion and reinvestment, or is it largely A&P, or are there -- is there another raw material or something else that kind of starts to slow that growth as we look to the back half?

Yes, Bill. A lot of the gross margin, almost all the gross margin improvement, was on the Household side, and a lot of it was absorption, and really some adjustments we had a year ago that we comped and were favorable this year. We had about maybe $6 million of favorable raw materials. So in the back half of the year, we do anticipate declines in that business that in general has a negative effect on gross margin. So it's not going to be a significant decline, but overall we don't expect the huge margin improvement that we did experience in the first of the year to repeat the back half. So that's really the story there. And then obviously, if you look across, especially with that business, is that business has a sales decline, and you think about overhead's flat to slightly down with some improvement from the restructuring initiatives, our SG&A as a percent of sales isn't necessarily going to improve as much, and then we do have some spending in A&P in the back half of the year that, as Ward said, is really part of the part of the plan to support our brands going forward.

Jason Gere, RBC Capital Markets.

Thanks, good morning. Hey, guys, I just wanted talk a little bit about emerging markets and your position in the wet shaving category there. So I know once upon a time, Ward, not that long ago, you said that there were more opportunities than you knew what to do with. So I guess, one, I wanted to just get a sense of how far along are you in terms of the markets you want to pursue in emerging markets? Is there still more runway of growth there? And two, just with some of the challenges that you're seeing now, Western Europe, US, what you've laid out today, does that slow down the pace at all? Or some of that incremental savings still kind of going towards building infrastructure in the markets that you want to be longer-term? Thanks.

That's a great question, and you kind of -- you framed it right in terms of there's more opportunities than we can actually go after it any one time. And I would say that the opportunities on the Personal Care side, and we're really talking Personal Care, because as you know, our Battery business already has an excellent presence in emerging markets, and it's strong, and in many of those markets doing well. On the Personal Care side, I would have to say our rear parity has been getting this innovation out the door in the existing developed markets. So that is the Japans and the US, or North Americas, and to a lesser extent, well, to some extent Western Europe. What we're still rolling out, even -- things that we launched last year, Hydro Silk in the US is going into Europe this year, Power, these sorts of things.

So I think with our limited resources, our focus is on launching innovation in developed markets. That, unfortunately, kind of move some of the emerging market opportunities we do see, I think, a little bit further down on the priority list. But they're still there, and there's some work going on in Personal Care in some emerging markets, but I would, like I said, say the real materiality right now is more on the innovation in the developed markets. If we had more resources, and I think a healthier overall global economy, the opportunity to go after emerging markets would rise up on that list. And we'll see where the macro economy goes. It is with these category declines that quoted, we've got to -- we're focused on those right now.

And then can you just put that into context with the margins on the Personal Care business? You've seen some improvement over the last couple of years. Obviously there's some investment here in the back half behind the innovation. But as you put that in terms of, I guess, infrastructure build, will margins kind of hold where they are, or will they -- or pull back, and then gradually improve once you get greater scale?

I won't go so far as to give you guidance on margins, but I would say is, just keep in mind kind of the natural margin enhancement that takes place in the razor and blade business over time when you move from razor handles per se to cartridges. And our cartridge market share in US Hydro continues to be at or above our hopes and expectations. That obviously -- that mix change towards cartridges from razor handles is a material contributor to enhanced gross margins on the Personal Care site. And again, the enhanced gross margins on the Household side are due to a really hard and good work being done in terms of the restructuring program we've talked about. So I was actually pretty happy with the margin performance for the quarter.

Chris Ferrera, Bank of America.

Guys, I guess I'm trying to get a little better handle on the flow earnings. And I guess kind of starting with Q2, right? Just taking a step back, you guys put up, call it 50% more EPS than you've ever put up in any Q2 in the history of the Company. And I get restructuring is picking up, but it was $15 million, right? It wasn't the biggest driver of this. I mean, core SG&A and core COGS were bigger, and we could talk about comp period. But this is just an enormous quarter relative to others. And I'm just trying to understand what the major drivers of that were. So any clarity you could give that would be really helpful.

Yes, Chris. So gross margin was a big beat, and as we just talked about on -- would be the last question, or question before. A lot of those cost savings are really kind of one-time in nature and not really going to continue through the back half of the year. We actually expect overall across the divisions, costs to be relatively flat versus a year ago. And I think the big drivers are essentially on the positive side, is the organic sales growth from EPC, even though -- or Personal Care, even though it's lower than we had previously expected, plus the additional savings from our restructuring project. But then again on the negative side, you've got the decline in Household Products sales, and we think that that will really probably be much greater in Q4, and possibly positive in Q3, but certainly down year remaining. And then the reinvestment that is yet to come, and then in addition something we really haven't talked about, we have unfavorable interest and currencies in the back half of the year that will be a drag as well.

And I guess, so following up. I mean, how big is that A&P reinvestment expectation for the back half of the year? Because, and I hear you on interest expense and FX been a slight negative, but I think you did say a slight negative. The detail you gave around, obviously you're looking for to $2.75 to $3.00 in the back half of the year versus $2.94 first half. That makes sense, but you're also going to take in, I don't know, $0.40, $0.50 of restructuring. So it's really implying kind of a core down 16% number on EPS, and again with $40 million in restructuring, it's hard to believe A&P is going to be by that much. So, I guess, can you just talk about order of magnitude? How much A&P will be up, and if not that huge a number, why do you think the core EPS ex-restructuring will be down so much?

Yes, a couple things. I think that you're $40 million to $50 million of restructuring goes beyond the range that we provided in the outlook. I think it's a little bit lower than that. So that's a little bit high. And really on A& P, just think about it. Back half of the year will certainly be higher than the first half, and higher than a year ago. So last year I think we were slightly below 11%. So I think what we're looking at is 11%-plus in the back half of the year. Those decisions, in terms of what that specific amount, have not been finalized, and I'm not going to give a quarterly cadence, but expect it to be higher than year ago, which I think was in the 10.6% range.

Connie Maneaty, BMO Capital.

Good morning. You had mentioned in your prepared remarks that you saw the cost of doing business is going up. How will you know what the right level of support for that is? And do you see those rising costs as medium-term or long-term changes?

I guess how you'll know what's the right level is based on management's 25-plus years of doing batteries, in the case of the Household side. And assessing, that's the daily work on the Household side. So we have a pretty good handle in terms of our expectations of where the cost of business is. We'll remain competitive, I guess, is the best way to answer that. On -- I'm sorry, blanked on the second part of your question.

I guess you've pretty much answered it. But if I could follow on, what is the order of magnitude of sales pressure from the distribution loss you're going to incur in the fourth quarter? What does that look like for fiscal '14? Because when these things start, they run for four quarters, right? Well, yes. It depends on the situation. I tell you that, obviously whatever distribution gains and losses that we've experienced are reflected in the guidance we've given for this year. So that's imputed in that, and of course we haven't given guidance for next year yet, and won't for a little bit. As we work through distribution gains and losses that have happened, or it may happen, that will be fully reflected in the guidance we will give for '14. So I'm just kind of begging off on that because it's kind of a guidance number, and we're not ready to do that.

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

Well, that really does conclude the call today. Thank you all for your attention and your interest, and have a good day.

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