Prestige Consumer Healthcare Inc (PBH) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Prestige Brands third-quarter 2018 earnings conference call. (Operator Instructions) As a reminder, today's conference may be recorded.

I'd now like to introduce your host for today's conference, Mr. Phil Terpolilli, Director of Investor Relations. Sir, please go ahead.

Thank you, operator, and good morning to everyone on the phone. Joining me on the call today are Ron Lombardi, our Chairman, President, and CEO, and Christine Sacco, our CFO.

On today's call, we will cover the highlights of our fiscal 2018 third quarter, review the financial results, provide an update to our full-year outlook, and then take questions from analysts. There's a slide presentation which accompanies today's call that can be accessed by visiting prestigebrands.com, clicking on the investors link, and then on today's webcast and presentation.

Please remember some of the information contained in this presentation today includes non-GAAP financial measures. Reconciliations between adjusted and reported financial measures are included in today's earnings release and slide presentation.

Also remember, during today's call, management will make forward-looking statements. All forward-looking statements involve risk and uncertainties, which we detail in a complete Safe Harbor on page 2 of the slide presentation accompanying the call.

Additional information concerning the factors that could cause results to differ materially from those in the forward-looking statements are contained under the heading risk factors in the Company's annual report on Form 10-K for the fiscal year ended March 31, 2017, and quarterly reports on Form 10-Q filed with the SEC.

With that, please turn to our earnings presentation, where I will turn it over to our CEO Ron Lombardi to walk through the highlights of Q3. Ron?

Thanks, Phil, and good morning, everyone. Let's begin on page 5 of our presentation. In the third quarter, our revenue performance was underpinned by strong consumption trends, in line with our long-term objectives. Solid consumption growth and market share gains in both Q3 and year to date are continued evidence that our long-term strategy is working, despite retailer destocking headwinds.

Q3 financial results were impacted by certain gross margin pressures from logistics costs, which we'll discuss in detail later on. But our strong top line and healthy overall margin profile enabled us to meet our EPS and cash flow expectations for the quarter.

In Q3, we recorded a large one-time gain associated with recent tax reform. Chris will go into detail later in our presentation, but the key takeaway is that we expect tax reform to have a positive impact to both our tax rate and cash flow. And provide us the potential opportunity to increase investment behind our long-term brand-building initiatives.

Let's turn to slide 6 and walk through a detailed review of our Q3 results. Starting with revenues, we experienced a net sales increase of approximately 25% to $270.6 million in the third quarter. Pro forma for Fleet, revenue growth in Q3 was 2%, which included the recognition of about $8 million from customer delivery timing from Q2 as expected. We were pleased with total Company consumption of 2.4%, which is evidence that our long-term brand-building strategy continues to drive results.

Moving to earnings, we reported adjusted EPS of $0.70 during the quarter compared to $0.61 last year. Gross margin in Q3 was 54.6%, which was impacted by higher freight and warehouse costs. We expect these higher costs to persist into Q4, and Chris will provide additional detail later on.

Adjusted free cash flow came in at approximately $45 million in the quarter. This continues to be driven by our industry-leading EBITDA margin, low capital spending, and low cash tax rate.

Lastly, as a reminder, last week marked the one-year anniversary of our Fleet ownership. The acquisition continues to perform in line with our expectations, and our focus has fully shifted towards our long-term brand-building strategy.

Now let's turn to slide 7 to discuss year-to-date highlights. Our December year-to-date results display impressive performance, particularly in light of a challenging retail environment. Total revenues were up over 22% year to date versus the prior year.

Pro forma revenue growth was up 1.5% year to date, trailing consumption trends by over a percentage point. This disconnect speaks to continued retailer destocking efforts over the last few years that have ranged in sales impact from an estimate of 0.5 point in fiscal 2017 to upwards of 200 basis points in fiscal 2016.

The disconnect that we are presently seeing between consumption and order rates accelerated in late December through the first few weeks in January. This destocking headwind is at the high end of what we would've expected for the year.

Adjusted EPS grew approximately 8% to $1.97 for December year to date. Cash flow remained strong, with adjusted free cash flow of over $156 million, which was used to reduce debt by $145 million year to date.

So to recap, we continue to generate solid revenue and earnings growth while experiencing strong consumption trends consistent with our long-term outlook. We continue to position our Company to be successful in a challenging environment through our leading brands and focused efforts around long-term brand building.

With that, let's turn to page 8 and discuss new product innovation. Innovation is one of the many tools we utilize to grow our top line as we leverage our strong new product innovation team to understand and fill unmet consumer needs in a variety of ways. The goal is to enhance brand-building efforts by developing new products that help grow both our brands and the category.

Let's look at a few examples of recent innovations that do this. On the left, we have two of what we call big guys or larger-scale innovation that use technology advances to improve brand efficacy. Compound W Complete utilizes a unique formula to treat warts faster and more effectively, while Nix Ultra is effective against super lice using a proprietary formula.

On the right, we have three examples of innovations that enhance connections with consumers in different ways. Simply by Summer's Eve appeals to the millennial consumer's desire for simple ingredients that are free of harsh chemicals.

Luden's new flavor introductions, like Red Hot Cinnamon, map consumer insight work around exciting flavor profiles. And last, we have BC Sinus and Congestion, which extend the brand known for its speed of relief into the sinus, congestion, and pain category. To summarize, our consistent pipeline of new products helps differentiate our brands in the marketplace and drives category growth, which is important to both us and our retail partners.

Now let's turn to slide 9. Here on slide 9, we provide a bigger picture view of our brand-building efforts and success of our brands over the last five years. When you look at the slide, it's clear our strategy to invest behind brands is yielding results.

Our strong and diverse portfolio allows us to use a wide variety of brand-building approaches. With number one market share brands representing approximately 60% of our sales, we are focused on the end goal of driving category growth.

Our brand-building methods are wide-ranging and we apply any number from our toolkit to drive growth. Items are shown on the left of the slide that make up our approach and include understanding consumer insights, leveraging brand heritage, focusing on innovation, and channel development. All of our efforts show in results.

Driven by brand building, over the last five years, our core brand portfolio has outpaced category growth by over 100 basis points, while private label has been essentially flat during this timeframe. Again, this graph is on the right side of the slide.

It's a clear reminder of the power of brands and the benefit that they can have to retailers. As many retailers continue to struggle to generate revenue growth, our brand strategy offers incident-driven, high-ring, and innovative products. This adds incremental foot traffic and basket size that are wins both for Prestige and retailers.

With that, let me turn the call over to Chris, who will take us through the financials for the quarter.

Thanks, Ron, and good morning, everyone. I will walk through our third-quarter results in greater detail and update you on our outlook on tax following recent reform.

On slide 11, we have our high-level third-quarter performance. Total revenue growth was 24.8% for the third quarter of fiscal 2018, while adjusted EPS increased approximately 15% in the third quarter versus prior year.

As Ron touched on earlier, our Q3 revenues included a return to normal average shipment times versus the second quarter and were underpinned by solid consumption trends. Results were impacted by retailer inventory management efforts and our most challenging growth comparison of the prior year.

Moving on to slide 12, we have our abbreviated P&L for the fiscal third quarter ended December 31, 2017. As a reminder, the information in today's presentation includes adjusted results that are reconciled in our earnings release.

Our revenues increased 24.8% in Q3. Fleet contributed $54.1 million of incremental revenue during the quarter and continues to grow in the mid-single-digit-plus range on a consumption basis. Strategic divestitures executed last fiscal year totaled approximately $6 million, which as of December we have fully lapped. Pro forma with Fleet, third-quarter revenue increased 2%, which compares to consumption growth of 2.4%.

Moving down the P&L, adjusted gross margin of 54.6% was below our expectations and prior year owing to multiple factors. First, similar to the first half of fiscal 2018, gross margin reflected the addition of the higher growth Fleet portfolio.

Second, we incurred higher freight costs in the third quarter as we expanded our pool of freight partners to maintain our service level. Third, we experienced high turnover levels at our warehouse that resulted in the use of an experienced higher-cost third-party workforce. We expect these increases in freight and warehousing expenses to continue into Q4 as we continue to prioritize our service levels to our customers.

In terms of A&P, we came in at 13.2% of revenue in Q3 and 14.3% year to date. A&P expense grew in dollars versus the prior year, attributable to a shifting mix of business towards our invest for growth brands.

As we have highlighted previously, there can be some variability in A&P from quarter to quarter. And we continue to invest behind the long-term brand-building efforts Ron discussed earlier.

Our adjusted G&A spending came in at 7.4% of total revenues for Q3. D&A was $8.3 million in the quarter, approximately $1.2 million of which was associated with cost of sales depreciation and is netted to arrive at gross profit. Finally, our adjusted EPS of $0.70 compared to $0.61 in the prior year.

Turning to slide 13, we highlight our cash flow for the third quarter of fiscal 2018. In Q3, we generated $44.8 million of adjusted free cash flow, down from $49.6 million a year ago, owing primarily to the timing of capital expenditures versus prior year.

For the first nine months of fiscal 2018, we generated strong free cash flow of $156.2 million or $2.92 per share, primarily attributable to our industry-leading financial profile, low CapEx requirements, and cash tax benefits associated with previous asset-structured acquisition deals.

Our primary use of cash flow has been debt reduction, and we've paid down $145 million in borrowings year to date. We finished Q3 with net debt of $2 billion and a leverage ratio of 5.4 times at quarter end. For full-year fiscal 2018, our adjusted free cash flow outlook remains unchanged, calling for $205 million or more, along with our strategy to put proceeds towards debt paydown.

With that, let's turn to slide 14 to walk through the implications of recent domestic tax reform. As you are all well aware, the Tax Cuts and Jobs Act was signed into law in late December and became effective January 1. The principal impact to our business is that it meaningfully lowers our ongoing tax rate and will generate incremental cash flow in fiscal 2019 beyond.

In the third quarter, we realized a $278 million non-cash income tax gain, resulting primarily from the revaluation of our deferred tax liabilities. Moving into Q4, we expect the effect of legislation to be a negligible benefit to our Q4 results.

For fiscal 2019, we expect an effective tax rate of approximately 26% versus our pre-legislation rate of 36.5%. We expect our annual cash flow to increase $10 million to $15 million per year beginning in fiscal 2019 due to the reduced federal rate.

Cash flow proceeds could be used in a variety of ways, including paying down debt more rapidly or reinvesting behind our long-term brand-building strategy. We are currently evaluating the best uses of the incremental cash flow and will provide an update on our May earnings call.

With that, I will turn it back to Ron.

Thanks, Chris. Let me wrap up with some closing remarks, and I will give an update on our 2018 outlook on slide 16. Our consumption expectation for the full year is unchanged. Year to date, we experienced continued solid consumption growth in the 2% to 3% range for our business. Our diverse needs-based portfolio is winning share in the marketplace and is well positioned to continue growth.

When we provided our original fiscal 2018 outlook range, it contemplated a wide range of variables, including retailer destocking efforts. This destocking headwind is coming in at the higher end of our original expectations and we are therefore narrowing our fiscal 2018 guidance metric to the low point of the range.

Specifically, for revenues, we now expect revenue growth of 18% or $1.040 billion in revenue. On earnings, we now expect adjusted EPS growth of plus-9% or $2.58 of adjusted EPS for the year. For free cash flow, we continue to anticipate $205 million or more, equating to $3.83 or more on a per-share basis.

Our long-term performance has been driven by our three-pronged strategy that starts with a focus on growing our business by winning with consumers. From there, we take our strong cash generation to reinvest behind brand building and use the remainder for strategic M&A.

We have continued to make progress on this strategy in the past year, growing our base business consumption, paying down debt with our cash flow, and acquiring Fleet. We will continue to execute against our strategy as we move forward in fiscal 2018 and beyond to create value for all of our stakeholders.

With that, let me the call over to the operator, who will open the lines for questions.

(Operator Instructions) Joe Altobello, Raymond James.

So first question, I want to start on the higher logistics costs and pressure you saw this quarter. One: when did you start to see that? And two: maybe a little bit more color on what is causing it? I know you mentioned higher turnover in some of your warehouses, but want to get a little more insight into what is exactly causing that.

Sure. Really the driver of it is our focus on service and meeting our retailers' requirements, Joe. So we started to see it at the beginning of the third quarter.

And really, there's two components. The first is the warehousing costs. We saw turnover, and as we supported our highest-quarter ever in sales, we brought in a third-party workforce that's at a higher cost compared to normal employees to ensure that we had the skills and the amount of people on hand to meet the sales expectations for the quarter.

And then in terms of freight costs, as we said on last quarter's call, we started to expand the number of freight carriers that we were using to make sure that we had the capacity needed. And that has initially come at a higher cost.

So we're going to continue to focus on meeting high service levels in Q4. So we anticipate keeping and incurring that higher level of cost through the fourth quarter, but obviously we are planning on trying to get back to a more historic level of cost associated with those activities over time.

And over time, is that a couple quarters or --?

So right now, we are just looking out through the fourth quarter. Obviously, we would like to get back to that as soon as possible, but we don't want to disrupt our service level. So we're going to take a measured approach as transitioning back to the more legacy arrangements we've had.

Okay. My second question was on Fleet. If you look at Fleet this quarter, you mentioned consumption still pretty strong: mid-single-digits plus. Fleet sales were down 1% in this quarter. They are up 3% year to date.

And if you look at your days sales outstanding, I think they are up eight days since you acquired Fleet. Maybe talk about those two items: why Fleet shipments are down, why destocking is so acute at Fleet, and what you can do to get those DSOs down. Thanks.

Okay, let me Chris address the second question first on -- well, let me comment on Fleet consumption first. It continues about the same level we've seen since we owned the business: in the high-single digit area. So it's been consistent.

Chris, why don't you address sales and the DSO question for Joe?

Yes, so from a sales perspective for Fleet, US sales continue to be strong. It's the international sales, where we primarily work through a distributor business. And we see sales variability with distributor businesses from quarter to quarter on a regular basis. So again, that's why we take you back to the mid- to high-single-digit consumption trends for Fleet overall, which we feel comfortable with.

From a DSO perspective, really just timing-related. No change in terms of the customers or asks from retailers in that regard.

Okay, thank you, guys.

Jon Andersen, William Blair.

Good morning, everybody. What should we make of the inventory destocking that you are experiencing right now? It looks like the gap between your shipments and consumption widened to maybe 300 basis points, 400 basis points in the quarter if you account for the $8 million of shipment timing that flipped from Q2 to Q3.

Do you have any kind of -- to what extent do you have visibility into this gap? And where do you think you and major retail customers are in reestablishing the target pipeline inventory levels?

Okay. So I guess there was a number of questions in there. First, let me start with consumption versus sales differences for the last couple of quarters. It's tough to compare just the third-quarter sales versus consumption because, as you just noted, we had a shift in recognizing sales in Q3 versus Q2.

So we actually looked at the two quarters together, and we actually saw a bit of a disconnect between the two beginning late in Q2 and into Q3. So even though we had our highest level of sales ever in the third quarter at over $270 million, we were impacted a bit by inventory destocking at retailers during the quarter.

So we might have seen an even better level of performance across the third quarter and the combination of the two quarters if we didn't have that impact. But again, when you go back to and focus on consumption, the business continue to have great momentum.

In terms of getting insight into it, as we said earlier in the prepared remarks, we saw a slowdown in order rates in the second half of December. And it continued into January, which is why we updated our full-year outlook with one quarter to go. So we have a little bit of an expectation of what we are going to realize going into the fourth quarter.

But the driver of it is ultimately same-store growth, and the retailers getting top-line growth and bottom-line growth is a challenge for them out there. They've got just a few levers that they can pull to help drive their performance and reducing inventory is one of them. So we continue to expect that it will continue out there until the retailer environment changes.

And as I mentioned earlier, it's been happening for a long time. It ebbs and flows on average -- it's hit us about 0.5 point, but it's been as much as 2 points. So a little bit out of our control and all we can do is really focus on building our brands, growing our share, and winning with consumers. That's how we think about it, Jon.

Okay. And coming back to Joe's question around logistics, is there -- what other levers, if any, can you pull as you -- maybe not in the fourth quarter, but as you look out into fiscal 2019 to help maybe offset or absorb some of those incremental costs and get back to more of a historical margin rate?

Is pricing a lever that you can pull? Are you able to have those discussion with retailers? Are there other areas that you feel like you can make some adjustments to kind of accommodate that?

Sure. And we are always working on these things. We don't sit around waiting for problems to pop up and then react to them. But for the logistics side of things, we are continuing to work with our 3PL provider who manages the warehouse for us in the logistics efforts. And we've actually augmented that by bringing in some additional resources on the freight side of things to help us over time work on negotiating better freight costs is one part of it.

The second is, although we don't talk about it a lot, we have a very well-defined cost improvement gross margin improvement plan here that we execute against. It takes a long time, as long as two years or more, to make a change in OTC supply chain, but we are constantly focusing on it and working on it.

And then in terms of a price, it's something we are constantly monitoring. The fact of the matter is it is a tough environment to try to push through any price increases. Many retailers have already took them ahead of us as they look to address their P&Ls.

But that doesn't mean there isn't opportunities for us. And more importantly, as we think about new products and innovation, that gives us another opportunity to come in and address our margins long term. So like many issues, there's lots of different ways for us to work at this, Jon, and we are focused on it over the long term.

Okay. And on Fleet, were the US shipments for Fleet consistent with the mid-single-digit consumption that you quoted? Was this simply a function of changes in the international portion of the business in the quarter? And what are your expectations for the Fleet business in aggregate as you look to Q4 and beyond?

Yes, Jon, this is Chris. So obviously for Fleet, a tough comp in Q3. This is the last period in which the private business had been out there putting the business up for sale. So tough comp to begin with.

But yes, the US business for Fleet was up. Did see some destocking, not up as high as consumption, but it is the international business that was down. And we talked about the distributor nature of that business.

Okay. And last one for me: where do you expect to be from a leverage perspective, I guess bank-defined, by year end? And thoughts on use of cash, M&A capacity going forward? Thanks.

Yes, so Jon, we talked about $145 million of paydown year to date on our debt this year. We will continue with free cash flow expectations for the year of $205 million or more in Q4 to use that towards debt paydown.

And as we talked about with the cash tax savings, we will look to continue to evaluate the uses of that increment of cash going forward. As we think about our leverage, going to continue, again, to pay down our debt and might come in slightly above the 5 times. But we feel well positioned as we head into fiscal 2019.

Okay, thank you.

Jason Gere, KeyBanc Capital Markets.

Okay, thanks, good morning. Maybe first question, if we can just go back to the destocking. And I guess if you could put some historical spin on this. Like when you've seen some of this in the past, and maybe not to the magnitude that you've seen typically, what's been the turnaround time before you start to see kind of the gap between consumption and shipment start to narrow?

And within the same context of destocking, I was just wondering if you could talk -- was this more mass-related versus drug? Can you talk about which channels maybe we're looking at? Obviously, not by their name, but just trying to parcel out where you might be seeing some of the pressures.

Morning, Jason. Your first question there was when might we expect this to even out a little bit. If you go back and look over the last four years -- and this has been happening for quite a while now -- we've seen kind of a slow drip impact and we've seen giant spikes, with most of a year's impact concentrated in a single quarter. If you go back, I think it was for fiscal 2016.

So it happens in lots of different ways. This one is a little bit more of a in between of a slow drip and concentrated in one quarter. It seems to be hitting us over a couple of quarters here, or concentrated, at least as far as we can see now, concentrated in a couple of quarters.

And then what we've seen historically, things kind of go back to the normal order patterns that we see in between the events. So that's the first part of it.

In terms of channels, really we are seeing it across all kinds of different channels. A bit more concentrated in drug and mass as they get caught up to their business objectives.

And I mean within that, I guess, I was just going to ask on the -- I'm losing my train of thought here. Actually, you know, let me just go on to the next question because I just lost my train of thought.

One thing I was actually kind of curious was that this quarter, you didn't really see much of a pickup in the cold and cough in the December quarter. But obviously, flu is at kind of all-time highs.

I was just wondering what you are seeing -- because you do have good exposure to that category. Just wondering what your expectations are for the March and how that kind of plays into, again, the shipment versus consumption kind of algorithm that's out there.

Sure. First, as a reminder, our business is nowhere near concentrated or impacted by cough/cold/flu like it used to be. We are closer to 5% of our portfolio really being tied into the cough/cold/flu kind of category is the first comment.

The second is not every type of component of that cough/cold/flu index really impacts us. If you look at it, flu is up almost 200% last year, the number of incidents of flu, but the cough index is actually down 2%. And that actually better aligns with our portfolio, which is concentrated around Chloraseptic, Luden's, and Sucrets.

Now, people who have flu may also have a sore throat, but in general, we are closer tied into that. So although the index being up is helpful to us, it doesn't move the needle for our business when it's a bad year like it was last year. We didn't really see any meaningful impact on our business and we are not expecting any meaningful impact on the business this year, although it's nice to have from an underlying standpoint.

Okay. And I remembered my train of thought from before. Just on the destocking, is there anything structural if we think about with online or private label? I know you've said over the last five years private label has really not gained any share, but can you talk about where the trends have been over the last three to six months?

I'm just wondering if -- is there anything within some of the destocking that's related to people starting to buy a little bit more online and that's why the retailers are managing those inventories. Or if they are seeing a little bit more private label.

I know we've heard rumors out there about other players maybe getting into OTC. I'm just wondering if you could just provide some context and how that kind of relates or doesn't relate to the destock issue that you are facing? Thanks.

Sure. Now, I can only comment on our part of the store. So these comments are specific to the categories and the space that we compete in versus what you may be hearing from other CPG and other spaces in the store.

For us, our business doesn't continue to be impacted by online, like other parts of the store and other sections of retail. Again, I would go back to needs-based. You wake up; someone in your household is sick. The shoppers may be going online to get information, but they are generally going to the store because of the general and immediate need for the product.

So we don't feel we are being impacted by -- the destocking is not a result of shoppers moving from brick-and-mortar to online. And then in terms of our SKU offering is consistent out there. We are not seeing a loss of distribution; we are not seeing an impact of a shift in competitive situations. So we are not being impacted by those factors.

Again, if you go back to that slide in today's deck, if you look at our core business, we are winning. We are growing the category; as a result, growing our share. And both the other branded, where there are branded competitors, and certainly private label is losing share in our categories as we successfully build our brand and grow our business.

Okay. And I am going to squeeze in this one last one. A&P in the quarter was up in dollars, down in percentage of sales. And I think the expectation was that it would be a little bit higher in the third quarter and then maybe lighter as a percentage of sales in the fourth quarter.

Was there any shift that went on there that you saw? How should we be thinking about the fourth quarter? And just how should we be thinking about A&P longer term? Is this -- I think going back to one of the prior questions about some of the near-term benefits, is this one of the areas where you might lean on a little bit more to kind of offset some of the, I guess, warehousing issues if pricing is not an option?

Jason, this is Chris. I will address the quarter and the near term and turn it to Ron for the longer-term view. You recall in Q2, we had an almost $40 million spend on A&P, so you hit it exactly right. We spend A&P dollars; that's how we look at it.

And so I would say A&P for Q3 was in line with our expectations. We see variability in quarters, as we've talked about, based on programs and the like. And as I think about Q4, we've talked about expecting continued gross margin pressure to persist in Q4 and guided our EPS for the year at $2.58.

Maybe Ron, you can comment on the longer term.

Yes. Again, Jason, our long-term strategy is to continue to increase the investment behind our brands. Again, referring back to that slide in the deck, it is yielding results. And we've taken our investment in A&P from 10% of sales to nearly 14% of sales over the last 5 or 6 years in a disciplined, measured approach and we are getting a return on it.

And I made the comment in my prepared remarks that the change in the tax code is going to add to our already fantastic financial profile and free cash flow. And we are going to take a look at whether we have some opportunity or options to take some of that windfall and increased cash flow from the results of the tax change to see if we can further increase the investment going forward.

So we will evaluate that and when we give our FY19 outlook, we will have some comments on that. But we are committed to continue to invest in long-term brand building.

Great, thank you, guys.

Linda Bolton Weiser, D.A. Davidson.

So first on the issue with the inventory reductions by retailers, it's really a secular thing going on. And it has to do with the shift from bricks-and-mortar to e-commerce. And some consumer product companies say that the inventory level at retail in an e-commerce more fully penetrated world is half of what the inventory would be in a brick-and-mortar world. So this is a very secular issue that's going on.

And I just wonder if you need to rethink that 2% to 3% long-term organic growth target. Because your consumption very well may hold up, but in terms of these secular headwinds, it just seems to me that maybe the 2% to 3% is overstating things a little bit.

So is that something you are giving some thought to? Maybe you could just comment on the very long term in terms of that targeted growth rate.

Yes, so again, for us, Linda, versus other CPG companies, we are not seeing the big shift to online versus brick-and-mortar. It was 1% of our sales last year. It is fast growing. We expect over the very long term that consumers will continue to move there.

But at the end of the day, there is a needs-based, an immediate needs-based component that we think is a bit different for our big categories versus others. So we will continue to evaluate it long term, but as we sit here today, we think that what we are seeing from inventory reductions is more about brick-and-mortar becoming more efficient in managing their inventories in better ways rather than them having to reduce inventory because their business is migrating away from them to online.

This isn't like diapers and other categories in the shaving side of things that are having a big dynamic shift. It's a bit different than that. So for now, we continue to feel good about that.

Okay. And then on the cost front, I'm listening to my other peer analysts that I work with about the trucking industry and some of the things going on there. And when you really talk to them, there has been a lot of underinvestment in that industry during the recession. And there's been changes in worker requirements for the trucks. There is a shortage of drivers.

It just seems that what I'm hearing is that there is an incredibly big inflationary thing going on with regard to trucking rates. And one of my other companies that reported yesterday experienced a 55% year-over-year increase in trucking rates.

So it seems, again, that this could be more of a longer-term issue, something that's not going to dissipate in just a quarter or two. So again, I'm just kind of wondering. Sometimes going to the Walmarts of the world and talking about these macro things is the way that you get price increase from the retailers.

So are you kind of laying your sights on that? And what do we think about if you can maintain that flat operating margin like you normally try to do in FY19, is that something that you think you can do, given the inflationary pressures?

Yes, so first of all in terms of 2019, we will talk about that at the May call. But for your specific questions around trucking and freight, we made decisions to expand the trucking firms that we were working with back at the end of September and into the quarter ended December to ensure that we had plenty of capacity to meet our service needs and support our largest quarter ever in sales.

So a big driver in the cost pressures, both for warehousing and logistics, were based on decisions that we made in partnership with our 3PL and our logistics providers. So we start with service and then our job is to manage -- work backwards and manage the cost and be effective.

And then, again, as I described earlier, we have broad-reaching gross margin improvement plans that have been in place for a long time that include price and a number of other things to try to manage this over the long term. That is our job is to manage the P&L for the long term and react and be proactive to the things that happen. And things do happen, Linda.

Okay. And then sorry if I didn't catch it, but did you give -- did Chris give a P&L tax rate normalized going forward that we should use just on a go-forward basis including the tax reform?

Sure, Linda. So we talk about -- again, in the current quarter, the normalized rate was the 36.5%. Negligible impact to Q4. And going forward, we talk about a 10 basis -- excuse me, about a 10-point reduction in our effective tax rate. So about 26%.

Thank you.

Frank Camma, Sidoti.

Good morning, guys. Thanks for the questions. A couple of quick things. One, just on A&P. How do you think about that from a mix perspective? And what I mean is the Fleet acquisition -- I mean, obviously, you're spending more dollars here. Percentage is down. I know you can't look at quarter to quarter.

But Summer's Eve to me seems like more promotional than Fleet, for example. So I wonder if you could talk about that a little bit and whether that is in fact the case.

So Summer's Eve can be a bit more promotional. The company has a history and we did this under an ownership of doing promotions around, for example, Valentine's Day and long weekends. So it's higher growth, a bit more -- a bit different than our other brands that we have. So we would expect to have a higher level of A&P support for that business compared to some of the other core brands that we have, especially the smaller core brands.

Okay. And staying on Fleet for a second, it clearly seems to be fully integrated. But can you talk about sort of the operational synergies? I know it takes a while for the supply contracts to be revised, etc. Can you talk a little bit about that and whatever opportunities you may have uncovered in the last year?

Sure. So over the last year, we consolidated their business from an order to cash standpoint. So we consolidated their finished goods warehouse into our facility in St. Louis. And the retailers now give us one order that includes the Fleet products as well as the Prestige legacy products. And consolidated their backroom functions and eliminated the Fleet organization's and moved them here to our New York headquarters.

And then we moved on to other supply chain opportunities. As you just mentioned, it takes time. And we do have the longer-term view of fill the factory there that we continue to work on. And we will have updates on as we make progress over time. But it's a long-term project to affect changes in OTC supply chain.

Okay. My last question is just related to the CapEx. Chris, could you -- it's pretty much the highest level I've seen. Is that related to Fleet and is that sort of a one-time item? Can you talk about that?

Sure. It is primarily related to Fleet. We had initially called for about $10 million of CapEx. We were a little light in the first half. So Q3 was in line with our expectations. Just timing-related.

Okay. Is that -- go ahead.

I think our initial outlook for the year was $10 million or so of capital plus or minus a couple of million dollars. We are talking about spending $10 million or $15 million on a $1 billion in revenue.

Right. No, no, I get it.

So I know it's the biggest number you've probably ever seen in one quarter. It pales in comparison to the revenue.

Great. All right, thanks, guys.

(Operator Instructions) Carla Casella, JPMorgan.

Just one question on your organic growth. Can you give us those rates by segment: US, international?

Yes, Carla. This is Chris. Our 2% pro forma organic growth breakdown: our North American OTC segment was up a little over 2.5%. Our international up about 6%, which is consistent with our expectations and the strong performance anchored around our Care business in Australia.

And our household business was down almost 9% this quarter, which is consistent actually with year-to-date performance for household. And as we often talk, we expect household to be down, declining as much as the high-single digits. So other than the destocking, pretty much in line with expectations.

And that profile of the US business growing 2.5%-plus, international 6%, and household down high-single digits is kind of consistent with the long-term expectations we would have for each of those buckets. So that comes out to be 2.5%-plus, which is right in the middle of our long-term outlook. So it's not out of line with what we might expect over the long term on average, Carla.

Okay, great. And then on the freight side, is that purely a US issue? Or are you starting to see any of that internationally?

It's exclusively US.

Okay, great. Thank you.

I am showing no further questions in queue at this time. I'd like to turn the call back to the Company for closing remarks.

I'd like to thank everybody for joining us today and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.