Jacqueline E. Burwitz - Energizer Holdings, Inc. Alan R. Hoskins - Energizer Holdings, Inc. Timothy W. Gorman - Energizer Holdings, Inc. Mark Stephen LaVigne - Energizer Holdings, Inc..

Wendy C. Nicholson - Citigroup Global Markets, Inc. Olivia Tong - Bank of America Merrill Lynch William B. Chappell - SunTrust Robinson Humphrey, Inc. Nik Modi - RBC Capital Markets LLC Stephen R. Powers - UBS Securities LLC Kevin Grundy - Jefferies LLC Jason M. Gere - KeyBanc Capital Markets, Inc.

William Michael Reuter - Bank of America Merrill Lynch Carla Casella - JPMorgan Securities LLC Mario Joseph Gabelli - The Gabelli Convertible & Income Securities Fund, Inc..

Good morning. My name is Ed, and I would like to introduce you to the conference today. I will be your conference operator. At this time, I would like to welcome everyone to the Energizer Third Quarter Fiscal Year 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 third 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; Tim Gorman, Interim 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 call over to Alan..

Thanks, Jackie, and good morning, everyone. As announced in our earnings release this morning, we delivered third quarter adjusted earnings per share of $0.43, up 34% versus last year. We also delivered $20 million in free cash flow in the quarter, up $9 million versus prior year.

These strong results were driven by healthy gross margin expansion resulting from our continued productivity initiatives, strong cost controls as we continue to simplify and standardize our business, and accretion from the auto care acquisition.

As a result of the strong performance in the quarter, we are increasing our fiscal 2017 adjusted earnings per share outlook from $2.85 to $2.90. Category trends also remain solid. The global battery category was up 1% in volume and value for the latest 12 weeks.

Energizer's total global battery value share was up 2.5 points attributable to pricing actions taken in several markets and a continued shift to the premium and specialty segments. As we discussed last quarter, over the course of this year we have announced price increases in over 20 markets, including our flagship Energizer MAX product in the U.S.

Volume share was also up 2.4 points with distribution and shelf space gains driving the increase. In addition to delivering strong performance in the quarter, we continue to invest behind our strategic priorities of leading with innovation, operating with excellence, and driving productivity gains to position Energizer for long-term growth.

Our team has built a strong pipeline of innovation across our portfolio which will be rolled out in the quarters and years to come.

In a moment, Tim will give you more details about our productivity initiatives, but right now I will focus on some of the changes we're making to optimize our portfolio to better meet consumer needs and changes in category dynamics.

Last quarter, I spoke about the trends that we have seen in the battery-operated devices, including a new class of devices centered around the Internet of Things and how these trends played to the strengths of our broad portfolio, including lithium and specialty batteries.

Based on these trends, we see an opportunity to realign and simplify our product portfolio to fully capitalize on the opportunities that lay ahead of us. We have begun rolling out a strategy that emphasizes the parts of our portfolio that we believe are best positioned to compete and win in each market.

For example, in North America we are simplifying and narrowing our product offering by repositioning Energizer Ultimate Lithium to be our primary performance offering. Ultimate Lithium, the world's longest-lasting AA battery, is ideally suited to capitalize on device trends and better compete in the performance segment of the category.

We are taking actions to increase the visibility and accessibility of Ultimate Lithium to increase the value proposition for consumers. We are able to make this investment and still maintain our strong margins through our continuous improvement to manufacturing processes and investments in productivity.

As a result of Ultimate Lithium becoming the focus in the performance segment in North America, we are shifting our efforts around EcoAdvanced to international markets where it has resonated well with consumers. At the end of the third quarter, we began transitioning to the new portfolio model and the exit of EcoAdvanced in North America.

These portfolio changes not only capitalize on category trends but also simplify our supply chain and streamline inventory which will enhance our ability to deliver long-term growth in our business.

We're also investing heavily in e-commerce to enhance our capabilities to drive growth in our product portfolio across all online and omni-channel retailers just as we have and will continue to do in the brick-and-mortar retail channel.

This includes investments designed to make Energizer and Eveready the preferred branded offerings across all of our retailers by increasing online visibility and delivering digital advertising to drive continued consumer demand.

E-commerce is currently a small part of the category and our sales, but it's growing rapidly and we expect that it will continue to do so over the next several years. We believe that iconic brands like Energizer and Eveready will continue to resonate online just as they do in traditional channels.

And year-to-date, we've more than doubled online sales. Before I turn the call over to Tim, I'd like to say a couple of words on our auto care acquisition which we've now owned for a full year. This business delivered $0.17 of accretion to our adjusted earnings per share over the last four quarters, in line with our expectations.

The integration was substantially completed in the third quarter, and our teams continue to develop strategies and execute plans to grow this business. In the Americas, we are executing plans to grow space in existing retailers.

And in international, we're beginning to execute our plans to leverage our platform to roll products out into key markets, with the goal of doubling the international sales by 2020. We are pleased with the contributions the auto care business has delivered and are confident in our future plans to drive growth.

Now, Tim Gorman, our Interim Chief Financial Officer, will provide a review of the financial results and full year outlook as well as to talk more about the investments we're making behind productivity.

Tim?.

Thanks, Alan, and good morning, everyone. I'll discuss the financial results for the third quarter, including providing detail on net sales and gross margins in the quarter. In addition, I will provide an example of the productivity initiatives we are investing behind and provide you with an update to the outlook for the full year.

For the quarter, adjusted earnings per share was $0.43, an increase of $0.11 or 34% versus the prior year, primarily due to improved gross margins, favorable overheads, accretion from the auto care acquisition of $0.03, and tax favorability.

A portion of the overhead favorability was due to the timing of spend as we expect higher spending on A&P in the fourth quarter to support our portfolio changes as we enter the holiday selling season.

Total net sales for the quarter increased $11 million or 3% as the auto care acquisition contributed $25.9 million or 7.2%, offset by decreased organic revenues of $9.4 million or 2.6% and unfavorable currencies of $5.5 million or 1.6%. The decline in organic revenues was primarily driven by the following items.

First, as Alan mentioned, we made investments during the quarter related to the portfolio changes which contributed an approximate 2% decrease in net sales during the quarter.

We leveraged our fast start to the year to invest in this portfolio realignment that we believe will support future profitable growth by providing a compelling value proposition for our consumers.

In addition, as we shared in last quarter's earning call, we lapped fill volumes associated with prior year distribution gains and promotional activity in the prior year that was not repeated in the current quarter.

Revenue was also negatively impacted by competitive conditions and unfavorable mix in several international markets, most notably Australia. Combined, these items decreased revenues by approximately 3% in the third quarter.

Finally, as we also discussed on last quarter's call, we initiated price increases in several markets, including the U.S., which increased revenues by approximately 2% in the current quarter.

Looking at revenues by geography, in the Americas organic net revenues declined 3.6% primarily driven by the investments in the portfolio optimization and lap of prior year fill volumes and promotional activity. In Asia Pacific, organic revenues were down 4.9% driven by competitive conditions and unfavorable mix.

In EMEA, organic revenues were up 2.3% primarily driven by pricing actions across several markets. Now moving down to the rest of the P&L. Gross margin, excluding the unusuals, was 42.7% in the quarter, an increase of 10 basis points compared to the prior year. The improvement was primarily driven by the following items.

First, we're lapping prior year investment spending relating to plant productivity initiatives that we called out on last year's call. This contributed an improvement of 140 basis points. Second, improved margins associated with price increases across several markets resulted in 110 basis points of further margin improvement.

Offsetting these favorable benefits to our margin were the unfavorable impacts of the investments made to support our portfolio changes noted above which decreased margins by approximately 100 basis points. Currency has negatively impacted margins by 50 basis points, and mix by 90 basis points.

The overall gross margin performance in the quarter was slightly better than expected as commodity headwinds were offset by other procurement savings. As such, our outlook for the full year gross margin rate, excluding unusuals, is now expected to improve by 125 to 150 basis points, a 25-basis point improvement from the prior outlook.

Alan discussed the investments we're making to our portfolio. I want to briefly touch on the investments we're making in productivity initiatives.

We drive continuous improvement through a variety of initiatives across our organization with a focus on projects that both eliminate unnecessary costs and simplify our structure in order to better serve our customers.

I would like to walk through one example, our power SKUs project, to give you a flavor for the opportunities we have to reduce costs and complexity by increasing our focus on SKUs that drive the most volume and profitability.

In North America, the number of SKUs we manage is driven by a number of factors, including country of origin, number of brands, cell construction, unique labels, and package configurations.

We're attacking the inherent complexity this creates on several fronts to reduce the number of SKUs by optimizing constructions, labels, and package configurations.

We believe this project will drive long-term growth by improving forecast accuracy in fill rates, increase supply chain efficiencies, and improve working capital by reducing inventory levels.

We are currently kicking off the work on power SKUs which is just one example of the strong pipeline of investment opportunities that we have identified over the next several years to improve our cost structure and drive best-in-class free cash flow. Now, looking at A&P.

A&P as a percent of net sales was 5.4%, a decrease of 90 basis points or $2.6 million compared to the prior year, primarily due to timing. As I'll discuss later on the call, our outlook calls for a significant increase in A&P spending in the fourth quarter to support our innovation and portfolio changes as we move into the holiday season.

This is consistent with what we shared during the last quarter's call. SG&A spending, excluding acquisition and integration costs, was $80.7 million in the current quarter, essentially flat to a year ago on a dollar basis.

As a percent of net sales, SG&A was 21.7%, 70 basis points lower compared to the prior year's 22.4% despite incremental SG&A associated with the auto care acquisition of approximately $3 million.

In addition, we realized a one-time gain in the quarter of $1.7 million associated with a land sale in a market we exited as part of our international go-to-market changes initiated after the spin. Foreign currencies negatively impacted pre-tax income by approximately $4 million, net of hedge impacts.

Our ex-unusual effective tax rate was 27.9% on a year-to-date basis compared to 30.6% in the prior year. The current quarter includes $1.4 million tax benefit from our book provision to tax return reconciliation associated with our federal return.

The book provision to tax return reconciliation benefit contributed $0.02 to the current quarter's adjusted earnings per share. As of this quarter, our teams have now substantially completed the integration of the auto care acquisition.

In the quarter, the auto care acquisition contributed incremental net sales of $25.9 million, segment profit of $7.1 million, and added $0.03 to our adjusted earnings per share.

Over the last four quarters, the auto care business contributed an incremental $0.17, excluding one-time acquisition and integration costs, to our adjusted earnings per share. This was in line with our expectations at the time of the acquisition. Moving to the balance sheet. We ended the quarter with $404 million in cash, substantially all offshore.

Our debt level at the end of the quarter was approximately $1.1 billion, which brings our debt to EBITDA to roughly 2.8 times on a trailing 12-month basis. We generated $20 million of free cash flow in the quarter compared to $11 million in the prior year third quarter. The $9 million increase included $4 million from one-time asset sales.

On a year-to-date basis, we've generated $155 million of free cash flow, including $27 million from asset sales as we've closed on the sale of several non-core international properties this year to lean out our footprint.

Free cash flow from our strong operating performance in the first three quarters was offset in part by our innovation and portfolio changes which required temporary increase in inventory levels. We expect the inventory levels to remain elevated over the balance of the year and will begin to normalize as we move through the holiday season.

In the quarter, we paid a dividend of approximately $17 million. And on a year-to-date basis, we've paid approximately $52 million. On a year-to-date basis, we've repurchased 192,000 shares of common stock for $8.6 million. There were no shares repurchased during the current quarter. Now turning to our outlook for the full year fiscal 2017.

As you saw on our announcement this morning, after three quarters we have already delivered earnings per share in excess of last year's full year results. Reflecting the strong performance in the third quarter, we are increasing our adjusted earnings per share outlook to $2.85 to $2.90.

The range is inclusive of the contribution of the auto care business. Our fourth quarter adjusted earnings per share will reflect further investments including the full implementation of the portfolio changes as well as the timing of overhead spending, in particular higher A&P spending.

As of the end of the third quarter, we have fully lapped the incremental impacts of the auto care acquisition, and the year-over-year will be comparable moving forward. We will however see a negative impact to net sales due to the completion of the divesture of the ad specialty business on May 1.

This was a non-core business acquired as part of HandStands that focus on promotional products and mouse pads. While annual net sales for this business were $14 million, EBITDA was only $1.8 million.

Exiting this business simplified our organization, facilitated a quick integration, and enabled us to better focus on the growth drivers of the core auto care business going forward. The impacts of the divestiture are reflected in our full year financial outlook.

Looking at the full year outlook and underlying assumptions in more detail, consistent with our prior outlook, total reported net sales for the year are expected to be up mid-single digits. Organic net sales are expected to be up low-single digits. Incremental revenue associated with the auto care acquisition increased net sales 5.2%.

These gains are partially offset by foreign currency headwinds expected to decrease net sales by 1.5% to 2%. Our full year gross margin rate is expected to improve by 125 to 150 basis points versus the prior year, which is an improvement of 25 basis points compared to our prior outlook.

We expect to incur unfavorable currency headwinds, commodity headwinds, and make further investments during the fourth quarter which are reflected in the range.

A&P spending in the fourth quarter is expected to be higher both in absolute dollars and as a percent of net sales compared to the prior year, and for the full year is expected to be at the lower end of our guided range of 6% to 7%, net of sales.

SG&A, excluding the acquisition and integration expenses on a percent of net sales basis, is expected to be at the upper end of our previously guided range of 19% to 20%, representing an improvement of approximately 50 basis points compared to the prior year.

The income tax rate, excluding the integration costs and the other unusual items, is now expected to be in the range of 28% to 28.5%, which is favorable to our previously provided range and reflects the benefits of the book provision to federal tax return reconciliation.

In addition, acquisition and integration costs are expected to be $9.5 million to $10 million. These costs are excluded from our adjusted earnings per share outlook of $2.85 to $2.90.

Capital spending is expected to be in the range of $30 million to $35 million, and depreciation and amortization is expected to be in the range of $45 million to $50 million, both unchanged from our prior outlook.

We expect to continue to deliver free cash flow for the full year and expect that to exceed $190 million, inclusive of the $27 million benefit from asset sales. In summary, in the third quarter we continue to make disciplined investments in innovation, our product portfolio, and productivity initiatives.

At the same time, we remain focused on improving margins and growing free cash flow. Now, I would like to turn the call back over to Alan for closing remarks..

Thanks, Tim. As you've seen, we're taking decisive action to build on the momentum that we've worked hard to achieve since our spin. This quarter, we continue to deliver significant earnings growth behind the operating with excellence in our battery business and integrating our auto care acquisition.

And as such, we increased our full year adjusted earnings per share outlook to $2.85 to $2.90. As we look ahead, we will continue to position our portfolio of iconic brands to best capitalize on market trends by reinvesting in our business and optimizing our product portfolio.

While our go-to-market approach will evolve for growing e-commerce and omni-channel space, our strategies remain the same. Lead with innovation, operate with excellence, and drive productivity gains in order to deliver consistent earnings and free cash flow growth year-after-year.

I'm very proud of how well the Energizer colleagues around the globe have executed and believed that we will continue to build the solid foundation for long-term success for our shareholders, our customers, and our consumers. Operator, we can now open it up for Q&A..

Thank you. We will now begin the question-and-answer session. Our first question comes from Wendy Nicholson of Citi Research. Please go ahead..

Hi. Good morning. Could you address what I think is kind of the elephant in the room which is sort of AmazonBasics and what you're seeing as a result of that? I mean, the Nielsen data that we see still looks like you're doing well in the track channels and the growth has come back in the track channels in the battery category.

But I'm curious in terms of your sense of how that product is performing in the marketplace. Does it impact your thinking in terms of what growth outlook you might offer for 2018? And have you had any sort of conversations with Amazon specifically about how your product is performing on their site relatively to their own private label? Thanks..

Yeah. Hi, Wendy. It's Alan.

How are you?.

Good..

So we've got – just to kind of – there's quite a few questions here. Let me just kind of start with our outlook for the category. It remains unchanged. We're still looking at total battery category volume to be flat to down, low single digits.

Keep in mind that there is the potential for that to trend more positively, contingent on how the Internet of Things moves forward. We continue to see the miniaturization of devices and continued demographic shifts which impact different segments of the business. We anticipate a continued shift to premium and specialty.

Both of those play to our strengths, whether it be in brick-and-mortar or online because of what we've been able to do and the strength of our brands in both of those segments. As you think about just online and brick-and-mortar in general, I just wanted to raise the point.

If you go back to what we talked about in the prepared remarks, we did see our 13-week global battery value share continue to increase up 2.5 share points to a 36 share, and in the U.S. we gained 2 share points. So in brick-and-mortar, Energizer is outpacing total battery category volume and value, and that's reflective in our share.

Now, a lot of that is being generated because we have a very clear, defined strategy on how to win and a path to purchase, and that's being reflected in terms of visibility and availability and the strong in-store execution we've seen.

In terms of Amazon, we actually have a very strong working relationship with Amazon, the way we do with our own brick-and-mortar retailers. We've been able to establish joint business plans with them in terms of how we're growing our business in that particular channel. And as we called out in the prepared remarks, we're actually seeing that double.

So we're very pleased with our performance there. I'm going to pause for a moment and hand it over to Mark LaVigne, our Chief Operating Officer, and he can delve into a little bit more detail on e-commerce in general to handle some of the questions you asked and some we anticipate we'll get.

Mark?.

Hi, Wendy. I think as you asked that question, there's a couple of components that we can unpack that a little bit. The first is if you look at Amazon as a retailer and their emphasis on private label, what I would say is we've dealt with retailers for a long time through that private label strategy. We know that brands matter in this category.

They matter because of not only the strength of the brands, but also the innovation that we bring to the market. And so continuing to invest in innovation, continuing to invest in brand-building is important and also helps justify the premium that we get over the private label brand.

So Amazon as a retailer from a private label perspective, that's one component. The other component is Amazon as a channel. And so if you look at e-commerce overall, it's 5% of our category sales. So we still have 95% of our business in brick-and-mortar as Alan mentioned, and we execute there every day.

This also tends to be more of a U.S.-centric discussion because the e-commerce landscape change pretty wildly depending upon which market and geography you're in across the world. However, we're laser-focused on e-commerce. We understand the growth that it comprises within the category.

We have dedicated teams that are working both with the pure play e-commerce sites like Amazon as well as our brick-and-mortar partners who are leaning into an omni-channel approach.

The objective for us is really simple, which is simply we want to be the brand selected by consumers regardless of how they shop, whether that's in brick-and-mortar or whether that's online. And the strategies have worked thus far. We're the number one branded player in online sales.

And as Alan mentioned, we've more than doubled our sales in the last 12 months. And really, the last component I think as it relates to the Amazon private label discussion is about pricing, and that's something we constantly analyze in every market in which we participate. We look at competitive positioning.

We look at the price differences between brands, between sub-brands, and between private label, as well as other aspects like commodity and currency and the innovation that we bring to market. So we monitor that. It's a multi-faceted dynamic as you might expect with Amazon, but we're on top of every aspect of it..

And as part of our capital allocation strategy, keep in mind we said first priority since Investor Day was to reinvest in our business. E-commerce is one of those places that we're doing that, whether that be with our brick-and-mortar partners or pure play players such as Amazon, and that will continue to be a part of our initiative going forward.

The other part of it obviously is investing in our portfolio, and we'll talk about more of that as we go through Q&A..

Sorry. I want to follow-up on the pricing issue.

Just in terms of the price gap on Amazon, are you contemplating making any changes to your pricing in the near-term given what seems like a lot of strength for that brand and the significant price discount that they're selling at?.

Yeah. So as you know, the retailers control pricing on-shelf to consumers. We use a lot of analytics and information to help guide decisions and to help inform our retail partners, whether it be online and brick-and-mortar, in terms of pricing strategies going forward. What I can tell you is that as we look at pricing, we do mind price gaps.

We do it across all markets around the world, whether it be everyday or promotional pricing as well as online. I mean, we have a pretty good sense of where gaps are today and where we like those gaps in terms of how we're positioning our pricing in the marketplace.

Typically, you're going to see private label pricing of 40% to 50% gap on average, whether it be brick-and-mortar or online. And that fluctuates day-to-day but we feel is manageable, in line with our overall strategy.

I think the key, and I want to emphasize this, what's really important about branded companies such as Energizer is that we continue to bring the innovation that meet consumers' needs and wants for the products that we serve to them to give them the best overall battery experience, the best overall lighting experience or the best overall experience with auto fragrance and auto appearance.

We feel that based on those consumer insights, we're able to bring that innovation to market, and that's creating value in our categories both for our retail partners, which is in part why you're seeing pricing activity occur, as well as online. So we're very comfortable with where we are.

We'll be prepared in time to share more and divulge more on our strategy. At this point, for competitive reasons as you would imagine, we're holding that pretty close to the best as we continue to make progress with our retail partners..

And Wendy, in terms of – it's always wise to stay away from future pricing discussions, but it is something that we constantly analyze. So we will always watch the price gaps and make sure we adjust accordingly. But equally important to that is our ability to leverage our two brands. In the pricing discussion, we have both Energizer and Eveready.

So we don't necessarily need to adjust pricing. We can introduce different products with either Energizer or Eveready with the broad portfolio that we have. So there's other ammunition that we have in order to adjust some of the pricing dynamics in the market..

Got it. Terrific. That's very helpful. I appreciate it. Thanks..

Thank you, Wendy..

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

Great. Thank you. I guess I want to talk a little bit more about the portfolio optimization.

And first, is that going to continue to hit about 2% until those actions lap next year? And it seems rather sudden in terms of at least introducing it to the Street particularly given that trends like Internet of Things, more going onto e-commerce, et cetera; they've been building for some time.

So I'd love to understand a little bit about how you kind of changed the decision to make some of the portfolio optimization changes that you're making now. Thanks..

Hi, Olivia. It's Alan. So let me just start – again, I'm going to go back to what we shared in Investor Day and what we've been holding consistent to since then, and that is we introduced a cycle plan of innovation.

Again, think about it as an evergreen, iterative plan that covers five years with quarter-to-quarter introductions of either marketing news or pure product innovation, and that's across our whole portfolio. We have each quarter in our cycle plan the teams as part of our three-year strategic plan.

They lay those out in a schedule of opportunities that we introduce to our retail partners, again, based on timing of what retail strategies are, when we know we're well positioned to introduce those concepts or innovations to the market, as well as the time and to the retailers' ability given the number of categories they manage to introduce these concepts to make them highly successful.

We don't anticipate that changing going over time just so that I'm clear with our sell-side partners that are listening on the call today. That will be an ongoing approach for us, to keep that innovation cycle plan green.

It's what's allowed us to not only bring innovation to the category, which has allowed us to take pricing in the category, it's allowed us to support our brands with our Bigger, Better, Bunnier campaign which is working exceptionally well for us. In addition, it's allowed us to work innovation across all the segments.

So part of what we communicated in an earlier strategy is that we wanted to reinvest back into the business and our brands to make sure we strengthen those, and we're doing that exceptionally well. We believe that's showing up not only in what we're generating across the P&L, but what we're seeing in our share numbers here in the market.

Now, there is some lag to the timing in which we introduce innovation and marketing news. And when you actually see that show up in the scan data, there's typically a lag effect that occurs. But we're very confident in our innovation plan.

Understand that we're going to talk to you today more about what we're doing with lithium and, to some degree, specialty. But understand there will be more innovation to come in the balance of the year; this is just the beginning.

And you can expect as we go into 2018 that that innovation will roll through the balance of the year there quarter-to-quarter as well, timed to our customers' joint business planning processes as well as our manufacturing and supply chain processes.

And then, Tim, any comments from you?.

And, Olivia, with respect to your question on the impact as we move into the balance of the year and the fourth quarter, the impact of the portfolio change will have an impact in the fourth quarter. That's reflected in our guidance.

But as you look at the trends that we've talked about, we are projecting to have organic revenue growth in the fourth quarter, and that's inclusive of the impact of the portfolio change. So the pricing that we've taken globally is having a positive impact as we move into the fourth quarter.

And as we mentioned on the previous call relative to pricing in North America, contractually we're not able to take that pricing with everyone, so there's going to be a portion of that pricing that kicks in at the beginning of fiscal year 2018. So we would expect carryover impacts as we move into fiscal year 2018..

And Olivia, this is Mark. I think from a fundamental standpoint as we engage in this category with our retailers, one of the things we pride ourselves on is being the category partner of choice for them. We actively monitor device trends as well as consumer insights to make sure that it informs our innovation and our marketing plans.

We're seeing two pronounced trends. One you mentioned which is the Internet of Things technology. As you said, it didn't just come out of the blue; it's been building for quite a while. But we've seen a more pronounced trend particularly as it relates to how the consumer interacts with the offerings in the store.

And so with a consumer in front of a battery set, choice is good but confusion is not. And what we've said is we have the ability to simplify the offering for consumers and continue to drive value for our retailers as well as clarity for our consumers as they're shopping in batteries.

We are uniquely positioned to offer this by leaning in with the lithium product that we have.

We've leveraged that product in the performance segment to drive both the Internet of Things growth that we're seeing, but also help provide better clarity for the consumer as they're shopping in the battery category, and thus far has been very well-received by both consumers as well as retailers..

And just to reiterate, we believe that regardless of either channel shifting that may occur or the emergence of new channels such as deep discounters, whether it be an Aldi or a Lidl, that we're very well-positioned with our broad portfolio and our innovation plan that we have the products that we need to provide us with the ability to provide our retail partners with a product offering that meets their needs and consumer needs across price points, but also it enables us to compete in all the categories.

So think about segments like premium, performance, price, and specialty. We're very well-positioned to compete in any competitive environment and are confident both in our innovation plan and our team's ability to execute against that..

Got it. Thanks. That's very helpful. If I could ask a question quickly on gross margin. Obviously, you raised the target for the year but it would suggest that you're looking for the trajectory to get much worse in Q4.

So I guess could you explain that a little bit better because if the savings are coming in better than expected, why would Q4 see such a degradation relative to the trend that you've seen so far this year?.

Yeah. Olivia, the trend as we move into the fourth quarter, again, the impact of the portfolio optimization as well as the commodity headwinds that we have are creating the drag as we move into the fourth quarter. In the third quarter, we were able to offset the commodity headwinds that we have with other procurement savings.

And so we expect the full impact of the commodity headwinds as we move into the fourth quarter..

Got it. Thank you..

Thank you, Olivia..

Our next question comes from Bill Chappell of SunTrust. Please go ahead..

Thanks. Good morning..

Good morning, Bill..

Good morning, Bill..

Just maybe you can help translate the portfolio optimization and what you've said just to make sure I have it right.

So what you're saying is you've had to elevate inventory of Lithium to get ready because you only have limited amount of production, and you're basically getting rid of Eco in the U.S., doubling your presence for Lithium, and going to focus more advertising and marketing on Lithium to trade the consumer further up.

And if that's the case, I guess, if one if that's true. And then, two, do you have – because I thought you had less kind of overall availability or production capacity for Lithium, so how do you continue that going forward? And then, wouldn't that also, if it's successful, change kind of your growth and margin metrics going forward if the U.S.

market is trading up more and more to Lithium and you're focused more behind that brand?.

Yeah. So, Bill, with respect to Lithium, that's right on point. So we are increasing our level of Lithium inventory as we are just at the beginning of making the changes to the portfolio. And, obviously, Lithium has a higher cost point than the other inventories that we have.

In addition, we are building inventories associated with innovation that we're bringing later in the year. And as Alan mentioned, for competitive reasons, we don't want to disclose that at this point but we'll talk further about that on the fourth quarter call.

Relative to the trade-up and the focus on Lithium as the primary offering in the performance category, we would hope that it would improve margin performance as we move forward. But, again, we are repositioning the Lithium price point to make it a more compelling value proposition for the consumer..

And Bill, beyond Lithium, as we said there will be more news coming in the balance of the year. And as Tim alluded to in his prepared remarks, you can anticipate that A&P, both dollars and percent of sale, will increase in the fourth quarter as support behind those initiatives..

So just on timing.

We're in the fourth quarter so, I mean, should I expect that in weeks, months? What's going to be expectations for a launch?.

You'll see it's scattered because of the way our media plan is written. You'll see some on TVC, so commercials will run on air. It's still our best ROI in terms of media spend. You'll also see an increase in digital media that we're investing behind our brand in support of what we're doing online.

You can expect that to start to roll out relatively soon. And as you know, if you look at our historical you see a ramp-up as we head toward the latter part of the season, moving into holiday season, to build awareness both top of mind and unaided for our brands. But that's historical with what we do. There's really no difference.

Most of what you're seeing now is a ramp-up of both visibility and accessibility in the stores, so think about that as increased space. In some cases, distribution as well as making sure that the retail price points are in line with the retailers' strategy to be able to introduce and drive conversion into that Lithium brand from performance (40:17)..

Yeah. And, Bill, with that advertising you have the creative of that, so that's been incurred now. And then it'll launch later this quarter and into the holiday season..

And part two of your question, think about the advertising, will be spread across our flagship brands. So think MAX and Lithium; don't just think Lithium..

Okay.

And sorry to go on too much, but with $400 million in cash albeit overseas and the stock down 20-something percent, were you precluded for any reason from repurchasing shares in the quarter?.

Yeah. So I'm going to go back to – as you'll recall, Bill, we've talked about taking a balanced approach to capital allocation.

Our priority in Q3, Q4 was really about rebalancing the portfolio to optimize what we're doing because of the potential positive impact it has on simplifying and streamlining our business as well as making sure that we're putting the products that consumers want and need in line with the trends that we're seeing, both Internet of Things and miniature devices, out in the market at the timing it needed to be there.

You can expect as we do that that that reinvestment in the business was our first priority Q3, Q4. We do opportunistically look at the chance to repurchase shares certainly to offset dilution, but at this point our focus was on reinvesting back into the business. And as you know, we paid a dividend but we also continue to look at M&A.

And we have been very aggressive, as we have in previous quarters, in looking at potential assets that are actionable, that are good, both strategic and financial fits with this business. So we want to make sure that we're really balancing our capital allocation based on longer-term opportunity, not just a short-term hit or benefit..

Okay. Thanks..

Our next question comes from Nik Modi of RBC. Please go ahead..

Thanks. Good morning, everyone..

Good morning..

Just a couple of questions. Good morning. Distribution has been a significant driver of the business since you guys have spun out. You've been much more effective in-store. And so, without naming names, just wanted to get some sense globally how the distribution pipeline looks, if you can share any context around that that you feel comfortable.

And then the second question comes down to R&D. So when you think about – when Energizer was combined with Edgewell, my sense is that there probably wasn't a steady stream of investments in R&D in the battery business. I think resources were getting shifted back and forth quite significantly.

Can you just talk about some of the changes that have been made in the R&D organization now versus what it was as a combined company? Because R&D takes time to get into the marketplace, so I'm just trying to understand kind of where we are in the cycle in terms of new products and disruptive products. Thanks..

Yeah. So Mark and I will tag team on that for you, Nik. Just starting with the distribution, if we go to the first question. Obviously, we picked up significant distribution and space over the course of the past year. We've lapped both the fill and that space in distribution entirely in the third quarter, so we've now cycled through that.

We have, as part of our plan and to be really clear, we've not changed our focus on driving effective category fundamentals. So think about that as availability and visibility being the first two priorities.

There are opportunities both in measured and non-measured, without getting into specific customers, where we will continue to pursue opportunities as part of our plan. Whether they come to fruition will be part of the negotiations we go through over the course of the next several quarters. But that is still a top priority for us.

We believe that it helps us grow our non-promoted share, our base share, again which really helps us generate the good organic sales that we're looking for, that – as you know – with our focus being maximizing free cash flow enables that to happen. So that remains a focus for us going forward both in measured and non-measured.

And then, Mark, would you like to speak to R&D?.

Yeah. And on the distribution front, I mean, again, from a U.S. perspective we're really global. We consistently look at new doors of distribution but then also expanding distribution within existing retailers. It's a battle we fight every day. There's always new opportunities that come up on a daily basis, and our teams actively work them.

Alan is very clear that it has to be profitable distribution. We don't want to get in a habit of buying shares. The teams are focused on that. You tend to see in the U.S. maybe bigger swings in terms of distribution just because of the size and scale of the retailers.

On the international side, you just don't see the big swings because of the fragmentation of the markets and the retailers. But, I mean, rest assured we're actively minding those opportunities both from a new door and expanded distribution perspective every day.

From an R&D perspective, I think your characterization was accurate in terms of the focus of R&D before the separation. We have brought a new leader into the R&D organization. We have taken our pipeline and refocused it in terms of our core products and business, some of the ancillary work that was going on.

With that focus, it's frankly allowed us to do a lot more innovation work with less resources, and not only that but we've expanded the innovation pipeline that we have quite dramatically. So we have a very healthy five-year pipeline of innovation. We are really excited about what we have to bring to the market in the coming years..

It's a much more efficient group, Nik..

Yeah. And just finally a clarification. So if I have it right, and just kind of going back to Bill Chappell's question, the 200 basis points of revenue drag that you're seeing from portfolio optimization, is that a function of the EcoAdvanced discontinuation in the U.S.

and then perhaps some investments you're making for shelf space for the Lithium line? Is that kind of a fair characterization?.

Yeah. That's a fair characterization, Nik. Obviously, to move the Eco off the shelf, we're doing couponing to address that and then make any investments behind Lithium. So that's a fair characterization..

Great. Thanks a lot, guys. Appreciate it..

Thank you, Nik..

Our next question comes from Stephen Powers from UBS. Please go ahead..

Thank you very much. So I guess actually a question if I could on SG&A. I think many investors coming into the year have maybe a bit more optimism on your ability to work down SG&A as a percentage of sales.

And I know the slight adjustment you've made today to your full year outlook is within the prior range, but it just runs counter to what I think has been the bias of many folks.

So just can you talk through any dynamics that are preventing you from ending the year maybe closer to 19% and 20%? And should we think about whether any of those items may also govern future progress on SG&A reduction?.

Yes. I think, again, it is within the range that we provided previously, and as now we've moved through the three quarters just providing some clarity on moving to the upper end of the range.

I'd call out that we've also achieved that while absorbing the costs associated with the auto care business and have driven significant synergies in that business. We're exceeding the $5 million synergy target, so we're on track to exceed the $5 million synergy target that we have for the auto care acquisition.

So there's really nothing that I'd call out that's unusual relative to SG&A. Again, we're trending lower than a year ago and we continue to maintain the focus on cost..

Okay. Fair enough. And just one last follow-up. I think you've done a good job of clarifying the portfolio optimization. But a year ago you were, to Nik's point earlier, winning a lot of distribution just given the – on the current portfolio.

And so in that context, the magnitude of the impact we're seeing now and the changes you're making seem, at least from the outside, a bit abrupt and maybe more stark than I would've expected.

So can you just talk through, maybe a little bit more color on how much of this is you being proactive in pushing this to the market because you see the consumer trends emerging or if this is a reaction to any kind of retailer observations or push back on what you've been doing? And just a little bit more color if you could on why now and why so abrupt perhaps.

Thanks..

Hi, Steve. It's Alan. I think you've characterized it very well in that it's a proactive approach. So think of it this way.

When we worked through our five-year innovation cycle, we also look at key trends, category, dynamics, market dynamics, and utilized a number of different data points combined with consumer insights to decide what and when we pulse in our cycle plan of innovation.

Now, obviously we don't announce that in advance for competitive reasons, but we do work with our retail partners almost a year in advance as we think about laying those plans out in their joint business planning session. So really from a customer and internal standpoint, zero surprise. It's very proactive and it's a planned effort.

We use trends in the marketplace. Again, think about the trends of Internet of Things and what's happening in both smart home and smart health devices. Many of those have created a new class of devices requiring primary power both in the premium, think AA, AAA, and specialty segments. Both of those bode well for us given our strength in those segments.

Take specialty as an example. Specialty is a segment that is high-margin for the retailer. It's also the fastest growing segment in the battery category, up over 3% in value during the latest 13 weeks globally.

When you think about the impact of that, Energizer having over 50 share, we're well-positioned and we take great pride, and always have, in working with our retail partners and leading them to what the next value creation solutions are for the category. We work very closely with them in doing that, and that will continue.

So the short answer is, yes, it was proactive; it was planned; it's part of our pulse cycle plan of innovation and marketing news. And as I said, as you think about balance of the year there'll be more to come..

Yeah. Steve, I'd also add just relative to – the changes that are being made are in the performance category. So that's – as you look at overall the battery category, it's a very small part of that segment, and we're really leaning in with Lithium.

That is the world's best-performing AA battery, and the change that we're making has resonated well with the retailers. So they're seeing this as a positive action that we're taking..

Great. Thanks a lot..

It's also allowed us to coincide with retailer resets. So part of the timing of what you're seeing is to coincide when retailers actually reset stores..

Yeah. Makes sense. Okay. Thank you very much..

Our next question comes from (51:51) of Deutsche Bank. Please go ahead..

Yes. Hi. Good morning. So just a couple of clarifying questions. First, on the portfolio realignment, is this mostly happening in the U.S. or is this global? And then my second question is just going back to e-commerce.

Are your margins in e-commerce in line with your margins in other channels?.

This is Mark. I'll handle the first question. In terms of the portfolio realignment, this is a North America-based decision, but the discipline that we engage in in terms of portfolio assessment and realignment is something we go through on a global basis, on a year-over-year basis.

So in terms of the realignment with Lithium in the performance segment, that is just a North America-based change..

Yeah. And relative to the margins in e-commerce, we really don't get into our margins by specific channels or areas..

Okay. Then just one other thing. Could you just give us a preview of how you're thinking about gross margin for next year? It seems like some of the commodity movements have improved sequentially for you. So just any thoughts that you might have on that would be helpful. Thanks..

Yeah. We're in the midst of our planning process right now, and we'll provide our outlook for 2018 on the fourth quarter call. That's consistent with what we've done historically..

Okay. Thanks..

Our next question comes from Kevin Grundy of Jefferies. Please go ahead..

Hey. Good morning, guys..

Good morning, Kevin..

Good morning, Kevin.

I wanted to come back to the topic of Amazon and AmazonBasics just to drill down a bit more there as we're thinking about implications for the industry profit pool particularly given the lack of public data available to us. So a handful of questions here if you wouldn't mind.

So one, what is the growth rate right now for the overall battery category online? If I'm not mistaken, I think you indicated 5% in channel mix and that your business is doubling online. Is the category also doubling online or are you gaining market share? That'll be number one.

Number two, what is your estimate for AmazonBasics' market share as a percent of the overall category, not just online? Industry estimates that we've picked up suggests it's close to 5%. Just wanted to see if that was consistent with your data.

And then more sort of qualitatively, back to the price gap issue and sort of a second derivative of what's going on online.

If price gaps do have to be addressed versus AmazonBasics, I know you sort of alluded to potentially a different lower-priced sort of offering or maybe leaning a little bit more heavily on lower-priced products that you have now.

But assuming that you did have to address price gaps versus AmazonBasics or store brands online, presumably, philosophically, you guys believe that pricing should be consistent across channels. So if that's sort of the case, a price adjustment made online would have implications for brick-and-mortar.

And then the last one, and I apologize for the long-winded question here. Has there been any discussion with respect to the Amazon supply contract for AmazonBasics? My current understanding it's being supplied by a manufacturer in the Far East. It's not being sourced from you guys or from Duracell or a spectrum of brands at this point.

Is there any discussion of that contract coming up for bid? So thank you for that long-winded question..

Hey, Kevin. It's Alan. I'm going to start with the last question and then Mark and Tim will join me on an answering the other four.

So in terms of Amazon supply, as you know I've got a policy that we don't talk about specific customers in terms of who we supply and how we supply, and I'd like to hold to that both for competitive and customer confidentiality agreement reasons. So I just want to kind of get that one off the table right away. And then, Mark, on the previous four..

So I think on the other questions, Kevin – and if we forget some of them, let us know. I think from an overall perspective, again you're right. It's about 5% of the category, within the battery category. It is growing rapidly. Our share within online sales is also growing.

On the other questions in terms of if it relates to pricing, I mean, you are correct in that we watch the gaps between our branded products as well as private label products. We continue to make sure those gaps don't get too wide. And as I mentioned, there are other levers that we can pull other than just price.

We can introduce other offerings throughout with our Eveready portfolio or even within the Energizer portfolio. Within that, I think we also watch gaps, as do our retailers across channels, to make sure that there's not a disparity that's creating a competitive disadvantage.

Obviously, the retailers set their price points and we lean in with them to make sure that we're doing what's best for their category, for their shopper, and for their consumer. But it's a dynamic that exists today even without Amazon.

If you think through the mass retail specialty channels, if you look at the dollar channels and the deep discounters that are making a resurgence in the U.S, it's a dynamic that exists and we work with today.

There's an added component to it with Amazon coming into play at a faster rate as well as the transparency that some of the Amazon technology enables to happen. But it's something we watch, we monitor. It can be pricing, it can be promotion, it can also be introduction of different products..

And there's also different tactics at brick-and-mortar. It's not always price that they'll revert to to be able to compete with online. They have, in front of them, optionality to use a number of different tactics to be able to compete with online differently..

Yeah. And relative to share, Kevin, we're the number one branded manufacturer online, so....

Okay. Is that Amazon number 5% of the overall category in the U.S. across channels for AmazonBasics? Is that roughly correct? And then number two, you said online is growing rapidly for the overall category.

Is it doubling? Is that a number you have at your fingertips?.

I don't have the number at my fingertips, Kevin. I would say that 5% of the category sales are online. The vast majority of that is through Amazon..

Okay. But just – and I'm sorry. For AmazonBasics, do they have about 5% share of the overall category in the U.S.? That was the one question..

No..

Okay. So it's less than that. One unrelated question, I appreciate it. Price increases that are being announced, what's been the retail receptivity to this? I guess in the U.S., we've picked up that in certain cases they may not stick or the retailer receptivity has not been favorable in certain cases.

Is there any merit to that?.

So we have, as you know, we announced our pricing in the first half of this fiscal year. We're starting to see that appear on-shelf to consumers now. We expect a full impact late in our fourth quarter and you'll see the annualized impact of that in fiscal year 2018.

We're very pleased with both the announcement and activity we're seeing behind our announced pricing. Again, we do that independently and we use a number of factors to decide both the level and the timing of that pricing that we announced to our retail partners.

We feel that the pricing that we have been able to announce, and take again, across 20 markets, that's going to allow us to continue to support our innovation plan, build our brands, and offset commodity headwinds that we know we're facing in the category.

So overall, we're seeing retail pricing show up on-shelf to consumers now across a number of different customers and across markets globally..

Our next question comes from Jason Gere of KeyBanc Capital Markets. Please go ahead..

Okay. Thanks. I think there are still some questions out there, so I guess I wanted to go back to the organic sales. I think, Tim, you said that fourth quarter, despite the portfolio realignment, that organic sales would still be positive largely because of the pricing. I just want to clarify if that's accurate..

Yes. And it's pricing and mix as well as some of the pacing of promotional volume that we have..

Okay. So if we just assume that, I know there are some challenges in Australia that kind of impacted the quarter.

But if we think about the impact continuing going forward, the pricing that's coming on September, as we shift into 2018 and despite I know the first quarter being a really tough comparison, is there anything out there that would preclude you guys from delivering organic sales that would be positive for next year? Is there anything that hasn't been discussed on this call that you think that would kind of limit that ability?.

Jason, again, we don't really talk about 2018 until we get fully through our plans and finalize those, and we'll be sharing those with you on the fourth quarter call..

Okay. And then I guess the second question would be just about I know you didn't talk about the gross margin for next year. But when we think about the SG&A, how much – to get the SG&A, I guess you probably benchmarked yourself to others out there and [Abrupt End] (01:01:21).

Jason?.

Pardon me. Jason? Jason, I do apologize. I think you may have dropped out of the queue by mistake. I do apologize. At this time, the next question comes from William Reuter of Bank of America Merrill Lynch. Please go ahead..

Morning, guys..

Good morning..

Good morning..

I just had one quick one, maybe trying to put some of these – the innovation pipeline that you talked about in the context of the next handful of years.

Can you talk about over the last couple of years, maybe 2016 or 2017, what percentage of your sales might have come from new products in those years? And then what types of a step-up we might be able to expect in the coming years?.

Yeah. From my perspective, Bill – this is Mark – I think from an R&D perspective what you've seen in terms of new product and innovation in 2016 and 2017 would be similar in terms of what you would see in future years.

I don't want to speak too specifically about our innovation pipeline, but I don't think you're seeing a dramatic difference in terms of the percentage of sales from new products or in terms of spend from R&D..

Yeah. And the innovation comes across all three categories that we have – batteries, lights, and auto care. And if you just take what we've done in Q3 as an example, we focused on long-lasting performance of our batteries and combined that with the success of our Bigger, Better, Bunnier campaign in the U.S.

In Q3 we've launched what we call a Touch Tech. It's basically a patented instant flashlight. We've made improvements to our best-selling Vision headlight line. We brought a new dual-scent mini diffuser platform which basically offers six fragran options.

So if you just take that as an example, to Tim's point we are bringing innovation across the portfolio and we would expect that to continue. Typically, you'll see more flagship innovation coming as we head into holiday..

Okay. That's my mistake. I thought I had heard that from a previous question. All right. I'll hand it to the others. Thank you..

Thank you..

Our next question comes from Carla Casella of JPMorgan. Please go ahead..

Hi.

I'm wondering – have you broken out what percentage of your battery today is premium and how far that could go over the next couple of quarters as you complete this conversion?.

Yeah. It's roughly half of the sales. In terms of what the mix shift looks like going forward, a lot of that will depend on what happens in the device universe. Again, the conversion to battery on-board is near completion and developed and developing. It's growing but flattening. We're anticipating that.

As it relates to premium, we're going to continue, you'll see both in what we do in our innovation across our portfolio including premium, that will continue to bring innovation and marketing news in all of it. But it's roughly 50% today..

Okay. And then just sort of a follow-up on the conversion. The inventory that you talked about being higher, that's on your own books.

But is the inventory in channel – when do you expect that to be clean and converted?.

Yeah. So the inventory build that we're talking about relative to our balance sheet and cash flow, that's our inventory. So it's inventory that we're building in advance of the portfolio changes and the innovation that's coming..

And keep in mind that when we exited Q2, retail inventories were at more normalized levels. So there's no inventory overload with the trade at this point..

Okay. Great. Thanks..

Yeah. And relative to the changes that are taking place, I just again emphasize that the changes that we've announced today are those that are in the performance category..

Okay. Great. Thanks..

Our next question comes from Mario Gabelli of GAMCO Investors. Please go ahead..

Hey, thanks. I'm interested in the new director you just added. Very interesting. It looks like to me that you're going to have a pretty good opportunity for transactions over the next couple of years..

Yeah. Good morning, Mario..

Unfortunately, I'm grazing on three or four different company calls. Did you talk about the areas in which you are – focuses in terms of transactions? You did the auto care. You're doing obviously consumer products.

What else would fit in?.

Yeah. So, Mario, it's Alan. Good morning. We are going to, as we've indicated before, really cast a wide net in the household space. That really gives us the opportunity to look at any number of assets without limiting ourselves to things that are just near adjacent.

We'd like to add – keep in mind, we're going to be focusing on cash-generating businesses. We like that. It's a good fit for us. We know how to run those well. As well as businesses that have similar operational opportunities for us. Some may be synergy plays, some may be growth plays, some may be cash plays.

But think about the broad household space so that it gives us opportunity to look at a number of assets..

Listen, some of the individuals on the call are pet parents which – does that include pet-related products?.

Certainly is within the consideration....

You won't dismiss it. Thanks very much. Take care..

Thank you, Mario..

That concludes the question-and-answer portion of the call. I would now like to turn the conference back over to Alan Hoskins for closing remarks..

Yeah. Thank you for joining us on the call today and for your continued interest in Energizer. Thank you, operator..

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