Jacqueline E. Burwitz - Energizer Holdings, Inc. Alan R. Hoskins - Energizer Holdings, Inc. Brian K. Hamm - Energizer Holdings, Inc. Mark Stephen LaVigne - Energizer Holdings, Inc..

William B. Chappell - SunTrust Robinson Humphrey, Inc. Kevin Grundy - Jefferies LLC William Michael Reuter - Bank of America Merrill Lynch Olivia Tong - Bank of America Merrill Lynch.

Good morning. My name is Daniel and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's Second Quarter Fiscal 2017 Conference Call. After the speakers' remarks, there will be a question-and-answer session. Please note that this event is being recorded.

I would now like to turn the conference call over to Jackie Burwitz, Vice President, Investor Relations. You may begin your conference..

Good morning and thank you for joining us. During the call, we will discuss our second quarter fiscal 2017 results and provide an update to our full-year outlook for fiscal 2017. With me this morning are Alan Hoskins, Chief Executive Officer; Brian Hamm, Chief Financial Officer; and Mark LaVigne, Chief Operating Officer.

This call is being recorded and will be available for replay via our website, energizerholdings.com. During the call, we may make statements about our expectations for future plans and financial and operating performance. Any such statements are forward-looking statements, which reflect our current views with respect to future events.

We also refer to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to 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.

Information concerning our category and market share discussed on this call relates to markets where we compete and are based on estimates using Energizer's internal data, data from industry analysis and adjustments that we believe to be reasonable.

Investors should review the risk factors in our Form 10-K and our other SEC filings for a description of the key factors affecting our business. These risks may cause actual results to differ materially from our forward-looking statements. We do not undertake to update these forward-looking statements.

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

Thanks, Jackie, and good morning, everyone. As announced in our earnings release this morning, our team delivered solid results from the second quarter, continuing our momentum from the start of the year.

Adjusted earnings per share were $0.50, up 67% versus the prior year, primarily driven by improved gross margin and a $0.05 contribution from the auto care acquisition.

Organic revenue was flat as the carryover benefit of distribution and space gains and favorable pricing and mix helped to offset the anticipated retailer inventory de-load following a strong holiday season. Gross margins, excluding unusual, improved 390 basis points versus the prior year.

Overall spending, excluding incremental cost for auto care, was nearly flat versus prior-year levels. And free cash flow in the quarter was $44 million, an increase of $21 million versus the prior year.

We have consistently talked about our focus on executing against our three strategic priorities, leading with innovation; operating with excellence; and driving productivity gains. In the second quarter, we continued to execute well against all three. Let me briefly take you through all three. First, leading with innovation.

In the past 12 months, we have introduced innovation and marketing news across our entire product portfolio. These actions have led to increased distribution in shelf space gains beginning in the second half of fiscal 2016.

During the second quarter, we continued to benefit from these gains, combined with favorable pricing and mix, which helped to offset the anticipated de-load of elevated retail inventory levels at the end of December quarter.

Leading with innovation will continue to be critical to our success, as we leverage our full portfolio to adjust to device trends, consumer needs and retailer strategies. Next, operate with excellence.

This quarter, we continued to operate with excellence by executing effective category fundamentals, which helped drive strong sell-through and profitable share gains.

In addition, our teams have executed a well-thought-out and developed approach for trade investment spending, promotion optimization and price increases in many markets around the globe. Since the beginning of this fiscal year, we have executed price increases in many of our top markets, including a recently announced price increase in the U.S.

These pricing actions will allow us to further invest behind innovation and brand building. We expect to see the impacts of the announced U.S. price increase late in the fourth quarter and into fiscal 2018, which will also help offset anticipated commodity cost headwinds next fiscal year.

In addition, our auto care integration is progressing as planned and we expect integration efforts to be completed by the end of the third quarter. Finally, driving productivity gains. We have a solid track record of driving productivity gains, which continued in the second quarter.

We delivered strong gross margins, up 390 basis points versus the prior year, driven in part by continued productivity improvements. Executing our three strategic priorities has been key to our success and will remain our primary focus as we look to continue our momentum. Now, moving to the battery category.

Global volume and value have continued to be slightly positive versus the prior year. In addition, we've continued to see a mix shift as the premium and specialty segments outpace the overall category.

We believe we are well positioned to capitalize on these trends as we leverage our full product portfolio and strong positions in the premium and specialty segments. In the U.S., category value and volume are roughly flat in the latest 12 weeks versus the prior year as winter storm volumes were essentially equal to the prior-year quarter.

As a result of the strong performance in the second quarter, we have increased our full-year earnings per share outlook to $2.75 to $2.85.

In addition, our strong start to the year and solid underlying business fundamentals have provided us the financial flexibility to increase investments in support of innovation, productivity initiatives and product portfolio optimization. These investments will help us continue our momentum through the remainder of fiscal 2017 and into fiscal 2018.

Now, I'd like to turn the call over to Brian for a review of the financial results and more details on our full-year outlook.

Brian?.

Thanks, Alan, and good morning, everyone. During my prepared remarks, I'll discuss the financial results for the second quarter and provide an update to our outlook for fiscal 2017. In the quarter, adjusted EPS increased $0.20 or 67% versus the prior year, primarily due to improved gross margins and a $0.05 contribution from the auto care acquisition.

Total net sales increased $25 million or 7.5%, as organic revenues were flat and the contribution from our auto care acquisition was $29 million or 8.8%, partially offset by a negative 1.3% impact from unfavorable currencies.

The flat organic revenue performance was primarily driven by three items, first; a carryover benefit of distribution and space gains achieved during the second half of fiscal 2016 contributed approximately 2%; second, favorable pricing and mix added approximately 2%; and third, these gains were fully offset by the expected retailer inventory de-load following a strong holiday season.

It is important to note that retail inventories are now at normalized levels as we exit quarter two. Looking at our net sales performance across the three geographic segments for the second quarter, Americas net sales increased $24 million or 12%.

Organic sales in the base business decreased approximately $3 million or 1%, as the carryover benefit of prior-year distribution and space gains and favorable price/mix were offset by the anticipated retail inventory de-loads.

The auto care business contributed approximately $27 million or 14% and currency impacts in the quarter were less than $1 million or 1%. Our Europe, Middle East and Africa net sales decreased approximately $2 million or 3%.

Organic sales in the base business increased 0.3% and the inclusion of the auto care business contributed approximately $2 million or 3%. However, these gains were more than offset by unfavorable currency impacts of approximately $4 million or 6%. In Asia Pacific, net sales were up nearly $4 million or 6%.

Organic growth in the base business added approximately $3 million or 4%, while both the auto care business and the impact of favorable currencies contributed approximately 1% each. Now, moving to the rest of the P&L, gross margin, excluding unusual, was 46.8% in the quarter, an increase of 390 basis points as compared to the prior year.

The 390 basis point improvement was primarily driven by the following four items, each contributing approximately 100 basis point improvement versus the prior year.

First, savings from productivity initiatives; second, favorable pricing and mix; third, favorable commodities; and fourth, the favorable impact from lapping prior-year charges incurred to drive productivity savings. Let me break down each of these in a bit more detail. First, productivity savings.

We've been able to make significant improvements to our manufacturing footprint and drive efficiencies since the 2013 restructuring project and we will continue to do so now and into the future. Next, favorable pricing and mix.

As we previously discussed, we have increased pricing in a number of markets around the globe and continued to take a well-thought-out and developed approach to revenue management to execute more effective promotions and trade spend investments. Third, favorable commodities.

Despite an increase in spot prices with many of the key commodities used in our manufacturing process, we have seen a favorable benefit from commodities and third-party purchased products thus far in fiscal 2017 due to the long-term pricing agreements executed by our procurement team.

While we realized a benefit in the second quarter, we do expect this to reverse in the balance of the year and commodities to be nearly flat for the full year. Finally, lapping prior-year charges.

As we discussed in the second and third quarters of fiscal 2016, we executed certain productivity improvement initiatives in order to drive ongoing efficiency and cost savings. As we highlighted above, we are realizing the benefits of these actions.

Turning to A&P, A&P as a percent of net sales was 4.6%, a decrease of 80 basis points or $1.5 million versus the prior year, primarily due to timing. SG&A spending, excluding acquisition and integration cost, was $88 million, an increase of $6.9 million over the prior year.

The increase was due in part to $3.1 million of incremental SG&A related to the acquired auto care business. SG&A as a percent of net sales, excluding acquisition and integration cost, was 24.5% as compared to 24.3% in the prior year.

In addition, we realized a one-time gain of $15 million from the sale of real estate assets in the quarter, as we continue to simplify and streamline our global real estate footprint post-spin. This amount is excluded from our adjusted earnings per share for the quarter.

Pre-tax income was negatively impacted by the movement in foreign currencies of approximately $3 million net of hedge impact. Our ex-unusual effective tax rate was 28.5% on a year-to-date basis as compared to 29.7% in the prior year.

The favorability versus the prior year was primarily due to a larger-than-expected benefit from the adoption of the stock compensation accounting guidance, and our country mix of earnings. Finally, our auto care acquisition continues to meet our financial expectations.

In the quarter, the auto care business generated incremental net sales of $29 million, segment profit of $10 million and added $0.05 to our earnings per share. And as Alan previously mentioned, the integration of this business is expected to being completed by the end of the third quarter.

Moving to the balance sheet, we ended the quarter with approximately $372 million in cash. Our debt level at the end of the quarter was approximately $1.1 billion, which equates to 2.8 times debt-to-EBITDA on a trailing 12-month basis, inclusive of our auto care business.

We generated $44 million of free cash flow in the quarter, an increase of $21 million as compared to the prior year, and $135 million on a year-to-date basis, an increase of $20 million versus a year ago.

This increase in cash flow was driven by our strong operating performance and the benefit of the real estate asset sale, partially offset by an increase in inventory levels. We have increased production and thereby inventory levels over the past two to three quarters.

As we strive to continue our top-line momentum, fulfill increased demand and support our product portfolio plans in the balance of the year, we expect that inventory levels will remain elevated throughout fiscal 2017 and begin to decline in fiscal 2018. On a year-to-date basis, we have repurchased 192,000 shares of common stock for $8.6 million.

And finally, we took advantage of a market opportunity during the quarter to reprice our $400 million term loans, leading to a 50 basis point improvement on the related interest rate spread. Now, turning to our outlook for the full year fiscal 2017.

Reflecting the strong performance in the second quarter, we are increasing our adjusted EPS outlook to $2.75 to $2.85. Based upon our updated full-year outlook, we estimate that second half of the year adjusted earnings per share will be nearly flat versus the prior year.

We expected the continued benefit from pricing actions and ongoing focus on productivity improvements and cost savings as well as one additional quarter of EPS accretion from the auto care acquisition will be offset by fully lapping prior-year distribution and space gains and related one-time fill volumes, continued currency headwinds based upon current rates, unfavorable impacts of increased commodity cost, increased A&P spending due to timing of advertising and innovation plans and increased strategic investment spending.

Looking at our specific full-year assumptions in more detail. Consistent with our prior outlook, total reported net sales for the year expected to be up mid-single digits. Organic net sales are expected to be up low-single digits.

We will begin to fully lap the benefit of the prior-year distribution and space gains as well as the related fill volumes beginning in the third quarter. Incremental revenue from the auto care acquisition is expected to increase net sales by approximately 5% to 6%.

These gains are expected to be partially offset by 1.5% to 2.5% of currency impacts based upon recent exchange rates. Our full-year gross margin rate is now expected to increase 100 basis points to 125 basis points versus the prior year and improvement versus our prior outlook.

The strong gross margin improvement in the first half is expected to be partially offset by unfavorable currency, the increased commodity cost and investment spending in the back half of the year.

Consistent with our prior outlook, SG&A, excluding acquisition and integration expenses, on a percent of sales basis is expected to be in the range of 19% to 20%, representing a 50 basis point to 100 basis point improvement versus the prior year.

The income tax rate, excluding integration costs and other unusual items, is now expected to be in the range of 28.5% to 29.5%, which is favorable to our previously-provided range. In addition, we continue to expect the acquisition and integration costs of $5 million to $10 million related to the auto care business.

These costs are excluded from our adjusted earnings per share outlook of $2.75 to $2.85.

Capital spending is expected to be in the range of $30 million to $35 million and depreciation and amortization is now expected to be in the range of $45 million to $50 million, inclusive of the full-year impact of the auto care amortization and accelerated depreciation related to certain productivity initiatives.

Free cash flow is now expected to exceed $190 million, an increase of $10 million versus our prior outlook. Before turning the call back over to Alan, I did want to update you on a recent development. On May 1, we sold the ad specialty business that was acquired as part of the HandStands acquisition.

This was a non-core business that focused on promotional products and mouse pads. Annual sales and EBITDA for this business were approximately $14 million and $1.8 million respectively. The impact of this divesture will not impact our full-year financial outlook. Now, I'd like to turn the call back over to Alan for closing remarks..

So, before we open it up for Q&A, I'd like to wrap up with a few key takeaways. We posted strong results in the second quarter. EPS increased 67% above prior year. Organic revenue was flat despite the anticipated impact from the de-load of retail inventories.

Gross margin remained strong and we continue to realize accretion from our auto care acquisition. We also had a strong start to the fiscal year. EPS was up $0.55 versus the prior year. Organic revenue has increased 4%. Gross margins are favorable 340 basis points.

Cost remains in line with expectations and we've realized $0.09 of accretion from the auto care acquisition. In addition, our team has built solid momentum by focusing on executing our strategic priorities to lead with innovation, operate with excellence and drive productivity improvements.

We continue to see positive category dynamics, highlighted by a favorable product mix to premium brands and specialty battery types. We'll look to capitalize on with our full product portfolio.

Behind the combination of strong operating performance and solid underlying business fundamentals, we've been able to increase investments in the back half of the year, which will allow us to continue our momentum into fiscal 2018 and beyond, while raising our current full-year EPS outlook to $2.75 to $2.85.

I'm very proud of how well the Energizer colleagues around the globe have executed and believe that we will continue to build the solid foundation for long-term success for our shareholders, customers, consumers and colleagues. Before we begin Q&A, I wanted to introduce Mark LaVigne, our Chief Operating Officer.

Many of you have previously met Mark during various investor presentations and Mark will be joining Brian and I on today's call and will assist in answering the questions. So, at this point, operator, we can open it up for Q&A and we'll turn it back to you..

Thank you. We will now begin the question-and-answer session. Our first question comes from Bill Chappell with SunTrust. Please go ahead..

Thanks, good morning..

Good morning, Bill..

Just a little more color on the both the new pricing and also distribution gains, can you give us – I think we had heard a couple months ago that your competitor was going to lead with pricing.

So, is it safe to say that everyone is following that as we go into fiscal 2018? And then, on distribution gains, I understand we will be lapping in the second half the big distribution gains from last year, but does that imply you haven't had any incremental distribution gains since this time last year?.

Yeah. So, Bill, we'll start with the second question first and then Mark and I will both cover you on the pricing question. So, in terms of distribution, we had some pretty significant distribution wins last year that we are lapping.

There had been subsequent distribution gains and space gains that we've made around the world with different customers, but not to the material effect of the ones that we had seen in the prior year. The thing that you have to take into consideration is the lapping of both those gains and the fill that will occur starting in the third quarter.

That's really the big change from first half of the year to what you are seeing in our outlook for the back half of the year. In terms of the pricing, just a quick general comment and then I'll turn it over to Mark. In terms of competition, I'll refer you back to them in terms of what they will and won't do regarding pricing.

We make all of our pricing decisions regarding our products independent and we take into account a number of different factors and variables when we do that. That could be everything from the market environment, macro trends, input costs and category dynamics, just to name a few.

We believe that the pricing actions that we have announced and have been taking across many of our markets in the first half of this fiscal year will really allow us to reinvest back into our innovation into our brands and candidly it's going to allow us to offset the increase in commodity cost that Brian talked about in his prepared remarks.

Globally, we've taken pricing in 15 markets around the world. This includes the U.S. and Canada. For the U.S., we announced that increase in the second quarter. We won't see any immediate impact until the fourth quarter, but you can expect full annualized impact to occur in fiscal-year 2018.

And then, Mark, anything you'd like to add?.

Thanks, Alan. I think from our perspective, not much to add. I think Alan covered it well. We go through a very deliberate systematic approach when it comes to pricing actions and we analyze pricing across a variety of areas.

Alan mentioned a number of competitive positioning, price gaps between sub-brands, commodities, currencies, the innovation where we have brought or will bring to the market and then, the underlying market category dynamics in the individual markets.

As we compile all of those insights, we determine whether we should take pricing in a given market and how much we should do so. Alan mentioned we've done that in 15 markets in this fiscal year alone, including the U.S. and Canada.

And so, from that perspective, it's an ongoing effort, it's not an episodic effort, it's something that we do regularly and we continue to analyze every market on an individual basis..

Okay. And just as a follow-up, I think, there was two or three customers you lost along the way past three, four years. You won one of them back. There was another one that maybe was coming up for bid this year.

Should we assume that you didn't win that back or is that still to be determined?.

So, Bill, again, I've got a policy with the team that we don't talk about specific customers.

What I can share is that as renewals do come up for distribution, and think about exclusive accounts where we're not present today, Energizer is certainly in the process of pursuing those businesses, but we'll only do so in the event that they make financial sense.

I mean, when we look at distribution, my direction to the team is it has got to be profitable. We've got to make sure that getting the distribution is one thing, but we do want to make sure that it is a profitable, decent business that we can help that customer grow. So, we do continue to look at these.

We did, to your point – you can see yourself at retail, we did win one of those back. The other one is not up for renewal at this time and the one that was, it had gone through its bidding process and at this point, we're still awaiting final decisions and actions in terms of how that moves forward.

But keep in mind in that, that one particular account that you are referring to, Energizer does have presence in that account. We do have a number of different brands.

It's just not the primary MAX brand that's listed at that particular account, but the balance of our portfolio in and out, across that, you'll see different Energizer brands at that particular account..

Got it. Thanks for the color..

You bet. Thanks, Bill..

Next question comes from Kevin Grundy with Jefferies. Please go ahead..

Thanks, guys. Good morning..

Good morning, Kevin..

Good morning, guys. I wanted to pick up on some of the pricing commentary as it pertains to your gross margin guidance. And what I guess I'm having a little bit difficulty reconciling is the pricing environment seems as rational as it's been in a long, long time.

It seems like not only are you able to cover cost, but it seems like and then some, because, Alan, you made some commentary that's allowing you to reinvest behind the business, behind brand building. So, all that is obviously great.

I guess what I am a little bit confused about is the commentary that you're able to cover your commodity cost relative to the gross margin guidance, and your gross margin performance has obviously been fantastic in the first half of the year. I think you're up somewhere in the ballpark of like 345 basis points.

So, I guess, I'm trying to get there in terms of what is implied in the back half of the year to get to your upwardly revised 100 basis points to 125 basis points, which still looks pretty conservative relative to how strong the performance has been and the pricing commentary..

Thanks.

Kevin, Brian will talk to you about the margin and I'll ask Mark to just provide some color on the timing of the increase, meaning why it's October in 2018?.

Kevin, this is Brian. You're right; year-to-date gross margin is favorable 340 basis points versus prior year, partly driven by favorability of commodities, which we expect to fully reverse in the back half of the year. We continue to see benefit of productivity savings. The pricing in this quarter was about a 100 basis point improvement.

We expect that to continue in quarter three and quarter four, but keep in mind, as to DUS (28:01) price increase, the teams are still finalizing the execution of that and so for modeling purposes, we'll see benefit of that late in the fourth quarter, but mostly in 2018.

And the missing piece in gross margin as far as what differentiates our first half versus second half, it's investment spend. And so, what we have built into our outlook, investment spend either as it relates to driving productivity initiatives like we did last year or supporting innovation and continuing to optimize our product portfolio.

And so, that investment spend is the missing piece that needs to be factored into the guidance and outlook that wasn't present in the first half, but because of the strong start to the year, we felt that there was an opportunity to increase investment spend.

That's going to allow us to continue our momentum into 2018, while still being able to increase our overall EPS outlook..

Yeah. And just to build on what Brian said, this is Mark, I think from a planning perspective, we engage with our customers with fairly lengthy lead times at times. And so, with some of the customers, we're still finalizing the execution and we're going to honor existing commitments as we're working through these.

So, part of that drives some of the favorable benefit that you'll see in Q4 and then into 2018..

Okay. Thanks, guys. Just one follow-up. Alan, the industry growth, we heard from Spectrum yesterday that they're seeing a slight uptick in the category. They're kind of pegging the industry growth at about 1%.

Is that how you see it, are you seeing the similar sort of uptick, is this mainly sort of pricing and mix driven? So, any commentary there would be helpful..

Yeah, Kevin, I think, you've captured it well. It is predominantly mix driven. So, think about a shift to the premium, alkaline and specialty segments. As a result of that, you're seeing that impact in North America, we're seeing it in Europe and certainly in Asia. We expect that to continue. So, I think, you've captured well.

The pricing piece of it, you've seen some pricing occur in different markets around the world. As Mark alluded to, the U.S.

piece of it really is going to kick-in in October and really into 2018, but the majority of it at this point, outside of pricing actions that have occurred in line with inflation, more macroeconomic conditions, most of it is going to be around mix shift..

And just to build on a couple of Alan's comments is that, the overall category has shown improvements. Our long-term outlook still remains flat to down low-single digits.

And then, in addition to some favorable mix shift trends that we've seen in premium and then also specialty, we've seen that the category reacts favorably to innovation and marketing news also within the performance segment. And so, by Energizer being able to leverage our full portfolio, we think we're in a good spot to winning going forward..

Good luck, guys..

Thank you, Kevin..

Thanks, Kevin..

Our next question comes from William Reuter with Bank of America. Please go ahead..

Good morning, guys..

Hi, Bill..

I don't know if you can touch on at all, you're talking about some increased investment spend next year that I think is going to offset a lot of these price increases that you're putting in.

But based upon kind of forward curves, should we think about 2018 being a year where you would actually be expanding gross margins or is your effort kind of based upon that increased investment just to keep to them flat?.

Every year, we look at strategically dialing up investments in certain areas. We historically have done that to drive productivity savings and to invest behind innovation. I think both of those have led to the strong start to this year and very solid year-over-year top and bottom-line performance.

As it relates to 2018, I don't want to get into the outlook at this time.

The teams are continuing to move through our strategic planning and we'll soon kick off the annual budgeting process for 2018, but as it relates to investment spend, we're going to look at the opportunities for investments, the resource allocations and then the return on those investments, all in line as to – also being able to deliver on our financial commitment that we give to our shareholders.

So, we look at it annually and it's also part of our long-term strategic planning process..

Bill, it's Alan. Think about it as it's really three buckets. It's innovation, driving productivity gains and optimizing our product portfolio..

Okay. And then, in terms of the innovation outlook, EcoAdvanced was obviously a pretty big introduction a year or two ago, whenever that came out.

Can you talk about what the outlook looks like for new products in both the base battery biz and then also in terms of innovation with your HandStands?.

Yeah. So, generally, we're not going to share our forward-look into our cycle plan of innovation for competitive reasons, but let me kind of give you some context as we think about our product portfolio. As you know, leading with innovation is one of our strategic priorities.

That requires that we use consumer insight to constantly evolve and then optimize our product portfolio and our cycle plan of innovation to give consumers the best overall battery experience as well as to bring innovation to our retail partners to create value in the category.

Energizer is able to leverage this innovation platform and our multi-brand strategy. Keep in mind, we've got both the Energizer and Eveready brands to keep our portfolio both fresh and relevant. You can expect that – that's what we'll do today and that will continue into the future.

And then, I'll ask Mark to comment a little bit more on the portfolio and innovation..

From a portfolio perspective, we are the category partner of choice with our retailers in our categories and part of that is being committed to understanding the device trends within the battery category.

Understanding those device trends lead us to insights, which allows us to engage with both our retailers and consumers that are consistent with their needs and then also it informs the innovation we bring to market, which Alan referenced, in our categories as well to ensure we have the best portfolio.

One example of this is in the specialty segment, where you're seeing an increased number of smaller devices, which is leading to an increased demand in specialty batteries and this is an area where we have a number one share.

So, as a result of that trend, we can innovate, we can leverage our strength in specialty and ensure that our customers are in the best position to win with their shoppers..

And, Bill, just to build on Alan and Mark's comment, as we look at innovation in a long-term innovation roadmap, things don't remain static.

We have to continue to adjust and leverage our full portfolio to Mark's point of looking at device trends, looking at the consumers' needs and also partnering with our retailers, so that our innovation plans and what we bring to market aligns with their strategies as well.

So, we're going to continue to adjust and leverage our full portfolio going forward..

Our experience in the category we'd say that constant flow of marketing news is what part of why you're seeing the value that's been created in the category. That would continue and the way to think about it is that news will be evergreen, it's constantly going to change.

So, you don't want to think about a particular brand or opportunity that we've created as being permanent. Those are intended to ebb and flow in and out of our cycle plan of innovation again to make sure that the consumer news is both fresh and relevant based on the insights that they are sharing.

And, again, we've talked about it a number of times, a lot of what we're focused on is giving the consumer the best overall battery experience and that's what's important, because in this category, brands matter and consumers want brands that they know and trust..

I'll pass to others. Thank you..

Our next question comes from Olivia Tong with Bank of America. Please go ahead..

Thanks. Just wondering if you could just comment overall on how you see the growth algorithm going forward. Organic sales has obviously been a big driver of gross margin this quarter. So, what's you're thinking from here? I know you had mentioned earlier about the retail inventory de-stocking, it sounds like you think it's done in your view.

I know you don't want to talk to specific retailers, but is there anything new on the distribution front as you start to lap some of those initial gains and then also how M&A sort of factors in? Thanks..

Yeah. So, Olivia, probably the three of us may tackle that one for you. It's a great question. So, on the distribution front again, we are always as part of focusing on the fundamentals looking at new distribution opportunities. These can be both in measured and non-measured channels. We will do that and we'll do it across the portfolio.

I know we historically talked a lot about the core business, which is battery, the bulk of the business, but those same opportunities are being pursued right now in our lighting business, our specialty business, our auto appearance and our auto fragrance business. So, that will continue. You could expect that.

That certainly does provide, as we think about organic growth going forward, how we take either brands, sub-segments or sub categories that potentially are underdeveloped in those markets and expand them leveraging our global footprint, but that will in a very targeted way to make sure that again when we set it up in those markets, it's set up for long-term success.

Innovation will also play a key role in this.

As we just talked about in the previous question and answer, it's really important that that freshness, that constant flow about the innovation and marketing news across our portfolio is brought to consumers, but also we're working with our retail partners in joint business planning a year in advance of a lot of the things that you may even see in the market and that will continue as well.

So, those are probably some of the bigger headlines. I think, the pricing piece of it certainly is going to come into play in 2018, where you'll see the annualized impact of the pricing action that we announced in the U.S. as well as across many other markets. And I'll pass it over to Brian and Mark and see if there're things they'd like to add..

Yeah, as far as the long-term outlook, in a given year, obviously, there's going to be some fluctuations depending upon the level of innovations, specific cost savings initiatives that we have going on and always impacted by macro trends, whether it's commodities or currencies.

But over the long term, keeping in mind that we still operate in a category that our projection is to be flat to down low-single digits, but with that said, we'll continue to try to drive trade up, leverage our full portfolio, maximize value within the category and then lead with innovation; it's critically important to allowing us to win and outpace the overall category.

But it is important that we do operate in a category where overall the projection is flat to low-single digit decline. Cost savings are part of what we do and what we're going to have to continue to do to drive long-term low-single-digit EBITDA growth and mid-single-digit free cash flow growth.

But again, in a given year, there is going to be some fluctuations depending upon the factors that we highlighted earlier..

Yeah and this is Mark. I think from a distribution standpoint, we continue to focus and fight for distribution everyday and that's either new distribution where we currently don't have a distribution in store or expanded distribution within a given store. And our focus and the battle is really won in store.

So, if we focus our execution in store, we get multi-facings within a store, that really helps from a distribution standpoint. So, that may not stand out as new distribution, but it's expanding existing distribution and that approach really applies to all of our categories. It applies to batteries, it applies to lights, applies to auto care as well.

And the importance of executing well in store (40;36) is something that we and our teams do exceptionally well. There is also pockets of growth that you'll continue to see, that we continue to leverage with our full portfolio with the Internet of Things and with the miniaturization of devices.

And it allows us to leverage our full portfolio and partner with our retailers to make sure that they are engaging with their shoppers in an appropriate way..

So, Olivia, I think, Brian has done a great job for us communicating the overall algorithm. Kind of think about it in three parts. It's what are we doing to drive organic, which is the growth element and that's the distribution, the pricing and the things that we're doing to focus on fundamentals.

Part two is what we're doing to drive productivity improvements in our business through continuous improvement. That will continue. That won't go away, because we see it as a feeder into driving the organic. If you were to draw a dotted line below that, that's where we start to look at M&A as sort of over the top.

We feel it's really important to continue to build on and maintain the health of the core business and use M&A as an opportunity to diversify the portfolio going forward.

Over the course of the last quarter, Mark, Brian and I – John Drabik have been very aggressive in continuing to look at opportunities, but as we've said, we want to be very selective and disciplined in our approach to make sure that whatever asset we bring into our portfolio is one that doesn't just fit well financially, but fits well strategically and operationally as well.

So, we've got some pretty strict criteria that we're running through our filter, but we do continue to aggressively look at those opportunities. So, the approach on M&A has not changed since Investor Day. If anything, we probably have got even more focused in terms of what we're looking at..

Great, thanks for the comprehensive answer. Two follow-ups on that. First, specifically to battery, competitive wise, Duracell has obviously been losing a fairly significant amount of share to you and Rayovac as well.

Any rumblings you are hearing on sort of what their path forward is, what their plans are in order to kind of remedy that, and timing as well.

And then, on A&P kind of going to 4.6% of sales, recognizing that you've got a lot of plans in place, innovation, the pricing, what have you, that you just discussed, is that 4.6% of your sales – of sales – in your view is that an anomaly and if so, what's sort of the right go-forward rate? Thank you..

Yeah, sure. A great question, thank you, Olivia. So, it's Alan, on the A&P, we're still planning on 6% to 7% as a percent of sales for the full year. That's in line with the previous outlook we provided. The 4.6% is more timing related.

So, think about A&P in fiscal 2017 as being more back loaded, in line with our advertizing and innovation that we'll be bringing to the market. So, it's really more about timing than anything.

I still believe, as I have said since Investor Day, that range of 6% to 7% will ebb and flow, but we feel there's an appropriate level of investment behind our brands to where we're not getting the saturation, but we're certainly above threshold, we are very comfortable there.

In terms of the competitive question, I'd have to defer you to our competitors to answer their plans going forward. What I can tell you is that the category has been and we believe will continue to be highly competitive, but Energizer really remains squarely focused in our three strategic priorities.

So, again, leading with innovation, driving productivity gains and operating with excellence. And we believe that executing against those three, as we have demonstrated so far, allows us to compete in any type of competitive environment and win. So, that will remain our focus going forward..

Just to build on Alan's comment on A&P is, I would not look into specific quarters A&P as a percent of sales, I would look at it more on the full-year basis.

But then also keeping in mind that we do have a seasonal nature of our business, where a lot of our sales are in our first fiscal quarter, where October, November and December is really important to us.

And so, as we look to deploy our advertizing dollars, we want to make sure that we get our biggest bang for our buck as well as align with our innovation plans. To Alan or Mark's point is, innovation plans in 2017 are more back-half loaded. So, full year, 6% to 7% is how to think about it..

Thanks, guys. I appreciate it..

Thanks, Olivia..

Thank you..

This concludes our question-and-answer session, as we have no further questions. I would like to now turn the conference back over to Alan Hoskins for any closing remarks..

Thank you, operator, and thanks to all of our partners for joining on the call today and your interest in Energizer. We appreciate it..

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