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

Dara W. Mohsenian - Morgan Stanley & Co. LLC William B. Chappell - SunTrust Robinson Humphrey, Inc. Faiza Alwy - Deutsche Bank Securities, Inc. Wendy C. Nicholson - Citigroup Global Markets, Inc.

Kevin Grundy - Jefferies LLC Olivia Tong - Bank of America Merrill Lynch William Michael Reuter - Bank of America Merrill Lynch Steven Strycula - UBS Securities LLC.

Good morning. My name is Steven and I will be your conference operator today. At this time, I'd like to welcome everyone to Energizer's Third Quarter Fiscal 2018 Conference Call. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this call is being recorded.

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

Good morning and thank you for joining us. During the call, we will discuss our results for the third quarter of fiscal 2018, our outlook for the remainder of the year, and update you on our acquisition of Spectrum Brands battery and portable lighting business.

With me this morning are Alan Hoskins, Chief Executive Officer; Tim Gorman, 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.

During our prepared remarks, we will refer to the acquisition of Spectrum's global battery and portable lighting products business as Spectrum acquisition or the acquisition of the Spectrum business.

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, 10-Q and 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'd like to turn the call over to Alan..

leading with innovation, operating with excellence, and driving productivity gains. Innovation is a key component of our strategy.

During the quarter, we continued to realize the benefits of our portfolio optimization to simplify the category and make the world's longest-lasting AA batteries, Energizer Ultimate Lithium, more visible and accessible to consumers.

Our innovation pipeline also remains strong across our business as we continue to invest behind both product performance and improve shopper experiences. We also continue to remain focused in operating with excellence.

Even as our team is heavily engaged in the steps necessary to achieve closing the Spectrum acquisition, they are still focused on ensuring that the base business is delivering results and meeting our goals for fiscal 2018.

The current quarter's solid organic growth, driven by volume and distribution gains, portfolio optimization and pricing, demonstrates the effectiveness of their focus.

And, finally, the team continues to drive productivity improvements by investing in continuous improvement initiatives such as optimizing our manufacturing footprint and streamlining our international overhead.

As we have discussed in previous quarters, we expect to see the benefits of these projects in our gross margin rate and SG&A in the fourth quarter. Continuous improvement is now embedded in our culture and will continue to be an ongoing focus to drive further efficiencies in our business.

Now, turning to global category trends for the 13 weeks ended May 2018. Value was up 2.7% and volume was flat. The improved category value performance was driven by consumers' response to innovation and pricing actions in several markets.

Energizer's global market share of 36.4% for the latest 13 weeks was up slightly versus the prior year as we cycled through last year's shelf space changes in the U.S. and also gained share across multiple international markets. Looking at just the U.S., Energizer market share was 35.9%, up 20 basis points.

And focusing more specifically on the online sales channel, the U.S. e-commerce battery category grew 30% with Energizer's share growing 5 points versus the same period a year ago to nearly a 24 value share. We continue to be the branded share leader in this fast-growing channel.

Overall, our team continues to do a great job focusing on core category fundamentals and operating with excellence through superior execution, both in-store and online. Now, turning to capital allocation.

We continue to take a balanced approach to capital allocation by reinvesting in the business, returning capital to shareholders by paying a meaningful dividend, and opportunistically repurchasing shares, as well as strategic M&A.

In addition, after we close the Spectrum acquisition, we will seek to use our strong cash flow to ensure we maintain a healthy balance sheet. This includes a focus on deleveraging from the increased debt levels. Now, I'd like to provide an update on our acquisition of the Spectrum business.

As we've discussed before, this transformational combination will expand Energizer's presence and scale in a number of international markets and broaden our manufacturing capabilities. In addition, Energizer's customers and consumers will benefit from accelerated innovation and a wider range of products.

This combination also provides Energizer an opportunity to drive cost efficiencies and enhance our ability to compete in the category through a broader product and brand portfolio.

Since announcing the Spectrum acquisition on January 16, our team and our outside advisors along with the team from Spectrum have completed a number of steps toward closing this acquisition.

We have achieved approval in a number of jurisdictions and continue to work towards obtaining approval from the two remaining regulatory authorities, the European Commission and Australia. Our integration teams from Energizer and Spectrum continue to work together in order to prepare for a smooth closing and orderly transition of the business.

Our current estimate for accretion remains unchanged with modest accretion to adjusted earnings per share in the first full year of ownership, excluding one-time transaction and integration costs. We expect to achieve further accretion following our realization of targeted synergies of $80 million to $100 million.

And we expect to hit a full run rate at the end of our third year of ownership. In addition, the top line and free cash flow growth from this acquisition will further enable us to drive long-term value creation. Consistent with what we've already shared previously, we expect the transaction to close by the end of calendar year 2018.

And, finally, we also recently completed a tuck-in acquisition that fits in nicely with our existing auto care business.

Adding the strength of the Nu Finish and Scratch Doctor Brands to our existing Lexol and Eagle One products expands our auto appearance portfolio and continues to strengthen our strategic vision of building our auto care business, both organically and through acquisitions.

Looking forward to our fourth quarter of fiscal 2018, we are maintaining our full year organic sales growth outlook of low single-digit growth and adjusted earnings per share of $3.30 to $3.40. Tim will review the full outlook in just a moment.

Overall, we continue to execute in our strategic initiatives and remain focused on delivering results in our core business while making great progress towards closing and integrating the Spectrum business. Now, I'll turn the call over to Tim for a review of the financial results and our financial outlook for fiscal 2018.

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, and I'll provide an update to our outlook for fiscal year 2018. For the quarter, adjusted earnings per share was $0.54, up 26% compared to $0.43 in the prior year third quarter.

The current quarter benefited from strong top line growth, improved margins, and the benefit of a lower tax rate. I would note the benefit from currency moderated during the quarter versus our expectations at the end of last quarter as the U.S. dollar strengthened against nearly all currencies.

Total net sales for the quarter increased $21 million or 5.6% to $393 million.

Excluding the favorable currency impact of $1 million, organic revenue grew 5.3%, driven by 3.5% improvement from new distribution gains in both geographic segments and increased space at existing customers; 1.3% contributions from favorable pricing actions; and 0.8% benefit from our portfolio realignment initiated in the back half of fiscal 2017.

These amounts were offset by a negative 30-basis-point impact from lapping the divestiture of the ASI business in May 2017. This will be the last quarter this divesture creates a negative comparison. While we increased our space at existing customer, including non-measured channels, retail inventory levels continue to be at normalized levels.

Looking at revenues by segment, in the Americas, reported net sales grew by 5.6%, which included organic revenue growth of 6.7% attributed to distribution gains, favorable pricing, the benefit of our portfolio optimization and improvements.

The key beneficiary of the portfolio realignment, lithium, continues to grow with value sales up 46% and volume up 91%. As expected, the rate of growth will begin to moderate as we lap the initial execution of our portfolio realignment in the back half of fiscal 2017.

In international, reported net sales also grew by 5.6% with organic sales up 3% benefiting from distribution gains, pricing actions in several markets, and improved mix. Gross margin was 44.8% in the third quarter, up 210 basis points from the prior year.

The improved gross margin rate was primarily due to lapping prior year investments supporting our portfolio optimization coupled with favorable impacts from pricing, product mix, and currency. A&P as a percent of net sales was 5.8%, up 40 basis points from the prior year third quarter.

Our A&P funding during this fiscal year has been more evenly distributed throughout the year, and therefore, we expect to incur less A&P during the fourth quarter compared to fiscal year 2017.

As you will recall, we had a significantly higher level of spending in the prior year fourth quarter to support our portfolio optimization and the introduction of our improved MAX offering.

SG&A, excluding acquisition and integration cost, was $89.5 million or 22.8% of net sales in the current quarter, up 30 basis points compared to the prior year third quarter. On an absolute dollar basis, SG&A increased $5.7 million, primarily due to the timing of benefit costs and an adjustment to international customs expense.

We incurred acquisition and integration costs of $16 billion in the current quarter which included legal, consulting, advisory fees in conjunction with obtaining regulatory approval, obtaining permanent financing, and planning for the closing and integration activities.

The amount incurred in the quarter is also net of a $10 million benefit from a foreign currency contract associated with our Euro bond offering. On a year-to-date basis, we've incurred $41 million of acquisition and integration cost.

Interest expense in the current quarter, excluding acquisition debt commitment fees, was $14.3 million, up $1 million compared to the prior year third quarter. The increased expense was attributable to increased borrowings on our revolver and increased rates on the floating portion of debt.

Currently, our overall weighted average interest rate is approximately 5%. We ended the quarter with about $1.2 billion of debt and our debt to EBITDA multiple stood at 3 times. We also had about $511 million of cash on hand at the end of the quarter with a significant portion held outside the U.S.

Our ex-unusual effective tax rate for the third quarter was 22.4% compared to 24.8% in the prior year third quarter. The decrease in the rate was driven primarily by the lower U.S. tax rate effective in fiscal 2018. In the quarter, we paid a dividend of $17 million. We did not repurchase any shares during the third quarter of fiscal 2018.

We will continue to take a balanced approach to capital allocation by, first, investing in our business to support long-term growth, returning capital to our shareholders through a meaningful dividend and opportunistic share repurchases, and, finally, pursuing M&A opportunities that are the right fit for Energizer.

As we discussed during last quarter's call, in the near-term, we will be focused on closing and integrating the Spectrum acquisition and expect to also use our free cash flow to deleverage from the debt levels incurred in conjunction with the acquisition. Before turning to our outlook for fiscal year 2018, I wanted to cover off on a couple of topics.

First, with respect to tariffs, we continue to monitor the impact of tariffs on our global business, including the impact on finished goods imported into the U.S. and Europe, as well as the impacts of component raw material input costs such as steel cans.

On last quarter's call, I mentioned the impacts we expected and on today's call I wanted to provide an update. Overall, we expect the impact from tariff activities in fiscal year 2018 to be minimal, in fiscal year 2019 to be less than 50 basis points of headwind on our gross margin rate absent pricing actions.

As we consider pricing actions currently and in the future, the impact of tariffs will be considered along with other factors, including inflation in currency, commodity costs, competitive landscape and innovation. As you know, the tariff situation remains highly fluid, and we will continue to provide updates as more information becomes available.

With respect to currency, in the first half of fiscal 2018, currencies have been a tailwind benefiting our results both from a top line and bottom line perspective. However, during the third quarter, we saw the benefit begin to significantly moderate as the U.S. dollar strengthened against several currencies, including the euro.

To illustrate this moderation, the currency benefit for net sales in the first half of fiscal 2018 was $16.6 million or 1.8%, while the currency benefit for net sales in the third quarter was $1.1 million or 0.3%. Based on current rates, we expect the currency impact to our top line to become a modest headwind as we move into the fourth quarter.

In addition, effective July 1, the Argentinian economy will be deemed highly inflationary resulting in our subsidiary being re-measured in U.S. dollars with future exchange gains and losses from the re-measurement being reflected in earnings rather than equity.

As the impact of highly inflationary accounting is dependent upon the movements in the Argentine peso, it is difficult to determine what if any the impact of highly inflationary accounting for Argentina may have on our consolidated financial statements. However, we do not expect those impacts to be material.

We have not included any adjustments for highly inflationary accounting in our outlook and any such movements recognized in subsequent periods will be considered an unusual item. During the quarter, we also raised the capital necessary to finance the acquisition of the Spectrum business.

In total, and subject to ultimately closing the acquisition, Energizer issued approximately $2.5 billion of new debt comprised of U.S. and Euro bonds, a new Term Loan A, Term Loan B, and a new undrawn revolver.

These facilities, combined with our existing $600 million of 2025 senior notes, which we will retain, will make up our pro forma debt capital structure. Including interest rate swaps already in place, our debt will be approximately 80% fixed in nature with the current estimate all-in interest rate of 5.3%.

We now also expect to use between $300 million and $325 million of cash held in our international markets to fund the acquisition, and our team has made significant progress in moving the cash to where it will ultimately be needed at closing.

Finally, we continue to progress in our preparation for closing the Spectrum acquisition and planning for integration activities after closing. We remain confident in our ability to achieve the expected synergy benefits of $80 million to $100 million during the first three years of ownership.

Initially, we will be focused on business continuity, ensuring our integration activities are not overly disruptive to the acquired businesses. As we have discussed on prior calls, synergy benefits will be more back-end loaded, and we expect to realize 10% in the first year of ownership and the balance of synergies realized in years two and three.

Now I would like to turn to our outlook for fiscal year 2018. While there are currency headwinds on a year-over-year basis as we move into the fourth quarter, the currency impacts do not change our outlook for the full year. We are maintaining our adjusted earnings per share outlook of $3.30 to $3.40.

Net sales on a reported basis are expected to be up low single digits. Organic net sales are expected to be up low single digits, including lapping the impact of storm activity of approximately $26 million.

The organic growth in fiscal 2018 is primarily driven by increased pricing actions across the globe, favorable impact from the portfolio optimization, and distribution gains and increased volumes at existing customer.

Favorable movements in foreign currency have moderated from our prior outlook and are now expected to benefit net sales in the range of flat to 1% impact. We continue to expect our gross margin rate to be flat to up 25 basis points versus fiscal year 2017, unchanged from last quarter.

As we noted on last quarter's call, we are fully locked on our commodity requirements for the current fiscal year, and our outlook also reflects the impact of any increased transportation cost. A&P spending is expected to be in the range of 6% to 7% of net sales, consistent with our long-term outlook.

Given we are now three-quarters of the way through the year and have committed a portion of our spending for the fourth quarter we expect the full year spending to trend to the lower end of our long-term range.

As we've discussed, spending will move up and down in the range reflecting the level of new product introduction and marketing news launched in any given year. We remain comfortable with our current level of spending as we continue to pursue more effective and efficient A&P spend.

SG&A as a percent of net sales is expected to be flat on a year-over-year basis, excluding acquisition and integration costs. Our current year continuous improvement initiatives have been fully executed with additional savings being realized in the fourth quarter.

Reflecting the moderation of currency benefits in the third quarter and headwinds expected in the fourth quarter, we now expect currency to negatively impact our pre-tax income by up to $5 million, net of hedge impact based on current rates. This has been revised downward from our previous outlook by approximately $15 million to $20 million.

Our x-unusual income tax rate is expected to be in the range of 23% to 25% taking into account the impact of the new U.S. tax legislation passed at the end of calendar year 2017 and our expected country mix of earnings. Our expectation for capital spending for the full year is approximately $30 million at the low end of our previous range.

And we now continue to expect depreciation and amortization to be in the range of $40 million to $50 million. We continue to expect adjusted free cash flow to be in the range of $240 million to $250 million, up $35 million to $45 million from the prior fiscal year.

The adjusted free cash flow in fiscal 2018 includes asset sales of $6 million compared to $27 million of asset sales included in fiscal 2017 adjusted free cash flow. Now, I would like to turn the call back over to Alan for closing remarks..

Thanks, Tim. Our strong results for the nine months is the result of our continued focus on our strategic priorities and strong execution.

As we continue to work towards closing and integration of the Spectrum business, we are confident that the addition of Rayovac and VARTA will complement the Energizer and Eveready brands to build an even stronger foundation going forward. We're excited about the opportunities ahead of us and we remain focused on delivering value for our shareholders.

Operator, we can now open it up to Q&A..

Thank you. We will now begin the question-and-answer session. And our first question comes from Dara Mohsenian with Morgan Stanley. Please go ahead..

Hey. Good morning, guys..

Morning, Dara..

Morning, Dara..

So, first, just a couple of detailed questions. The unchanged full year guidance includes the worst currency outlook, so yet you've kept your full year EPS guidance. So, on an underlying basis something offsets the FX impact.

Can you give me a bit more detail on what's driving that? I assume maybe you're more favorable within the unchanged gross margin and org sales ranges but any clarity there would be helpful.

And then, second, with the moderating FX outlook you mentioned in the back half, can you give us a rough idea of what type of EPS impact you'd see in fiscal 2019 based on where we are here today in terms of current spot rates and any hedging actions that you have in place?.

Yeah, Dara. I'll take both of your questions. So, yeah, the outlook does reflect the impacts of currency. And so, offsetting that, we see improved gross margin rate offsetting that impact, combined with slightly lower A&P spend and improved overhead, combined with a favorable tax impact.

So, those four factors are really offsetting the headwind that we see from currencies. But for the currency, we would have likely taken our outlook up for adjusted EPS. With respect to the currency, so yes, it does become a headwind as we move into the fourth quarter, and that headwind will continue as we move into next year.

Again, in November, we'll provide our outlook for fiscal year 2019, and I'd like to combine everything together and give you kind of the full view of the business for fiscal year 2019 as we normally do in November..

Okay. Fair enough. And if I could just slip in one follow-up. You mentioned distribution gains in incremental shelf space at existing customers.

Can you just give us a bit more color there? What's driving those gains? What type of magnitude should we expect? Did that happen recently so it continues for a few quarters? And I know you won't want to comment on Spectrum's U.S.

business, but I guess I'm just wondering how much of that benefit is coming from others in the industry besides Spectrum Brands. I'm just trying to think about the incrementality to the total organization once the deal closes given we've seen some weakness in Spectrum recently. Thanks..

Dara. It's Mark. I'll take that one. On the distribution gains, again, it's across the globe. There are some distribution gains that you'll see in the share numbers in the U.S. which you started to see the benefit of recently. We would expect those to continue for the coming quarters as well.

In international, it's really spread across a number of markets with gains in France, the UK, and Germany, just to name a few. So, those are all distribution gains.

In terms of the allocation of some of those, from the Spectrum business, again we compete against all of our competitors, and Spectrum is no different today than they were before we announced the deal. We're continuing to compete in the market as we always have.

I would think some of those share gains probably came at a number of our competitors' expense, including the Spectrum business..

Dara, it's Alan. We're seeing growth not only in the deals we measure, we're seeing in the non-tracked as well both DIY, home center, and e-commerce..

Thanks..

Thank you..

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

Thanks. Good morning..

Good morning, Bill..

Good morning, Bill..

Hey. I guess first question on pricing. I would assume, if you're looking at pricing to offset tariffs, commodities, other things, that your – the goal would be to implement something October 1, prior to the holidays, or the next fiscal year.

Is that right on the timeframe, and if that's the case, wouldn't you know by now kind of where we stand?.

So, we're going to – Bill, it's Alan. We always look at whether or not pricing is warranted in our business. We do that independent of our competitors. We do look at a number of factors in the category. So, we're certainly taking into consideration any inflation hikes around commodity, certainly movement in currencies.

There is certainly, in our pipeline, innovation and marketing news. Whether we attach pricing to that or not are discussions we have internally on a regular basis. And then we'll look at any other number of factors, including category dynamics that are currently occurring and overall macro conditions.

So, the way to think about it is we take pricing in the category every year in different markets around the world. We do look at our pricing and promotion across our 140 markets regularly, and we'll use that information on going to take decisions that are going to be in the best interest of Energizer going forward on pricing.

That's going to be an ongoing discussion with the management team..

Okay. And then back on the distribution gains and market share gains, maybe you could give a little more color on where distribution gains come from? You have pretty good ACV in the U.S. and around world.

So, I'm trying to understand what new accounts you're getting into, and then should we assume that means you're pretty well-positioned, these are gains that will hold up as we go into the holiday season?.

Bill, it's Mark. I think on the distribution gains, the way to think about that is expanded distribution with existing customers. We continue to make sure that we're fighting for additional space throughout the U.S. In the U.S., there's one large retailer that recently went through a shelf reset.

We were able to gain some additional space, which is driving some of the numbers in the U.S. In international, the customer base tends to be a little more fragmented. So, there's not necessarily one customer that drives it. You're also seeing healthy growth for us in unmeasured channels with DIY and e-commerce as well.

And then in terms of – I don't want to sort of forecast the holiday period. We're well-positioned. We feel good about our plans. We feel good about where we're sitting heading into the holiday. And at this point, it's all about execution.

Obviously, that's something we'll talk about in November as we're giving 2019 guidance, because that will be the first quarter of our new fiscal year..

And, Bill, as you'll recall, our approach is not only expanding our space in existing customers. It's getting new doors, and that's that availability factor that the organization is focused on. So, both in the U.S.

and internationally in particular, you're seeing us expand those new doors as both customers expand new store count and we're able to pick up new customers. That's an ongoing focus for Energizer, and will be going forward as well..

Got it. Thanks..

Thank you, Bill..

Our next question comes from Faiza Alwy with Deutsche Bank. Please go ahead..

Yes. Hi. Good morning..

Good morning..

A couple questions. The first one is, if you could talk a little bit about cost inflation and what you're seeing in the commodity environment. Like, we're seeing some steel prices are increasing and then EMD prices seem to have increased quite a bit. I think last quarter you said that you were 25% locked in for 2019.

If you could maybe give us an update on that and how you are thinking generally about commodities next year..

Yes. So, as mentioned during the prepared remarks, for this year, we're locked. And as you indicated last call, we indicated we were 25% locked for next year. As we sit here now, we're in excess of 60% locked for fiscal year 2019. We are seeing some inflation in the commodities as we look forward to fiscal year 2019.

We're not seeing the same level of increase that we saw in fiscal year 2018. But we look, and as we talk about, we lock in our requirements through forward buys out 12 to 18 months. And so, our procurement team is executing that strategy as we move forward..

Okay. Great. And then just if you could give us an update on what you – I know you guided to an adjusted free cash flow number for this year.

What's the actual free cash flow going to be when taking into account sort of some of the costs encountered with the Spectrum deal? And then, I think, you had previously said that the cost to achieve the synergies related with Spectrum were around $100 million.

Does that include some of these costs related to doing the deal? And maybe if you could give us a combined amount of what the total costs would be..

Yeah. So, what we have in terms of the cost to achieve the synergies, we indicated that that was 1 to 1.25 times synergy benefits that we laid out. In terms of where we stand right now for the current year, that adjusted free cash flow of $240 million to $250 million.

Through the first three quarters, the acquisition and integration costs are approximately $41 million. You'd probably see a consistent run rate ex the gain that we had reflected in the third quarter. So, if you back out the $10 million of gain that we saw in the third quarter, our run rate on cost would have been roughly $25 million.

I see something approximating that as we move into the fourth quarter, and then you've got the debt commitment fees and the interest that we have on the new financing moving forward. So, those would all be baked in to lower that adjusted free cash flow.

We really do focus on the adjusted free cash flow because that's really the underlying fundamental of the business as we move forward..

Okay. Thank you..

Thank you..

Our next question comes from Wendy Nicholson with Citi. Please go ahead..

Hi. Good morning..

Good morning, Wendy..

Two questions. First on the track channel data, the Energizer market shares look terrific but Eveready looks like it's been giving up some share over the last couple of months. And I'm wondering if that's by design.

Is that reflective of the distribution change? But also can you tell us the impact on gross margins from that? Is Eveready a significantly lower gross margins, or is that helping your gross margin right now? Just help me understand whether I should care about that divergent trend or not..

Yes. So, Wendy, we've talked about part of the longer-term trend is trade-up and improved mix as we move forward. So, that growth you're seeing in Energizer versus the decline in Eveready is a positive given the higher-margin profile of the Energizer brand. So, it is having a positive impact on gross margin as we move forward.

We haven't called out or quantified what that impact is, but it is a positive impact. That, combined with our continuous improvement initiatives, are helping us to maintain that positive – we've called it up 25 basis points on a year-over-year basis despite the headwinds of commodities, currency and transportation costs..

Perfect. Okay. That sounds great. But then my other question is on the antitrust review in Western Europe. I think when the approval came through in the U.S., we were all kind of, like, my gosh, that was fast. That's awesome. Europe seems to be taking a little bit longer.

I don't know if that's just my interpretation, but I'm just wondering if there's any color you can offer.

Is there anything that we should be worried about? Is there any specific thing that's being negotiated? And how quickly, after you get the European approval, can you close?.

Wendy, it's Mark. I'll cover this one. On antitrust review, again, when we announced the deal in January, we thought it would be by the end of the year. I think we're still tracking against that. We've made a lot of progress since the last time we talked. We're in active discussions with the regulators both at the EU as well as in Australia.

We still expect to hit the timing by the end of the year. I don't think there's any reason for less optimism today than there was before. These things tend to take on a life of their own and they go through a variety of twist and turns.

And so what we're doing is simply sitting down with the regulators, explaining to them why we believe this is ultimately good for consumers and why we believe that the transaction should be approved. And we still believe we'll be able to achieve that.

It takes time to sit down and do a deeper analysis for them when there's two competitors that are merging..

But it's fair to say that you're not allowed at this point to have any conversations with any of the big European retail partners where Rayovac has – or Spectrum historically has done a lot of private-label work, right? You've got to get the deal closed before you have any sense for whether you're going to be able to maintain those contracts or any of that.

Is that right?.

So, we are restricted in terms of conversations we can have with customers and we're making sure – I mean what the regulators want is for both of us to operate our businesses as they were before and that's exactly what we're doing. There are obviously communications that we have with customers about what they can expect.

And so we make sure that we coordinate those communications between us and Spectrum, so that they hear the same message from both of us in terms of it being business as usual and what they can expect in the future.

And then on your other question, Wendy, in terms of how fast could we be ready to close, I think, it's a couple weeks, two to three weeks from when you do get clearance is when you'll be able to pull it together and probably close.

A lot of that will depend on where you are in a given quarter or a given month in terms of when do you want to actually close. But with the teams are ready, they're working together. Spectrum has been a great counterparty for us in terms of the cooperation we've gotten from them.

So, in terms of once we're able to get the final regulatory approval, we'll be ready to close within a couple weeks and feel good about the position that business will be in..

Terrific. Fantastic. Thanks so much..

Thanks, Wendy..

Thank you..

Our next question is from Kevin Grundy with Jefferies. Please go ahead..

Hey. Good morning, everyone..

Good morning, Kevin..

Good morning, Kevin..

Alan, I wanted to start with the question on the long-term outlook for the global battery category and for Energizer. I look back at your slide presentation for the debt roadshow back in May, included some comments like "stable with improving trends" and optimism about growth potential in the industry.

Can you talk us through the biggest factors in the end markets that are now driving this optimism? Are you prepared to provide a new outlook for the Street? Should the market be thinking more towards sustainable 2% to 3% organic sales growth for this company? And if so, what's the composition there between volume and price mix? And then I have a follow up..

Okay. Thanks, Kevin. Yeah. So, in our algorithm, obviously, one of our financial objectives is to grow at a rate faster than the category. So, that sort of answers the last one without quantifying it specifically at this point until Tim is prepared to give more guidance in November.

In terms of the outlook, as you know, since separation, we've had an outlook of flat to down low single digits in the category. Since that time, we've seen the category value certainly up, driven both by pricing and some level of consumer response to the innovation that's been brought to the category.

As we look forward, we're seeing stabilization in the device population. So, stabilization of devices as the conversion to battery onboard nears completion and maturity both in developed and developing markets. There is the potential, as you alluded to, for the category to outpace our outlook with some potential upside to that.

The biggest drivers of that really we've seen consistently over several quarters now. They would be the growth of the Internet of Things. And that's again requiring higher-performing smaller batteries, and this in particular is in both the smart home, smart health-connected type devices.

Second, we're seeing the continued miniaturization of devices and that's requiring smaller cell sizes such as AAA and specialty which, as you know, play well into our portfolio. And then, thirdly, continued demographic shifts.

That's both, as an example, an aging population with a higher level of awareness around hearing loss and the need for and adoption of hearing aids to satisfy that requirement. That bodes well for the hearing aid sub-segment going forward.

And then as you look at developing markets, you've got an increased presence of children in households along with a higher disposable income. So, there's a higher awareness and requirement for brands. And as a result, we expect that to help certainly in many developing markets.

We're going to continue to monitor those trends over several quarters before we were to revise our outlook. If we see the trends as being sustainable, we feel we'd be in a better position to make a change to that call..

And, Kevin, in addition to the volume aspects that Alan was talking about, the other factor is just if you look at the promotional environment. And I'll focus on the U.S. in particular. You've seen that environment be stable. So, latest 13 weeks, you're seeing percentage of dollars on promotion down slightly.

You're seeing percent of actual dollar price decreases to be flat. And you're seeing AUP trends up. And so those are all positive. And if you look at Energizer, we're actually tracking favorably to those metrics. So, that, coupled with the volume, are the things that we're looking at as we look longer-term..

And important to call out is in that particular data is you're seeing more full-priced displays on the floor, so there's less discounting that's occurring with that merchandise that's being sold through to consumers. And, as you know, that's a relatively good thing for the category, and that's improving sequentially quarter-to-quarter as well..

Okay. All very helpful. One follow-up. This is probably for Mark. I hope you can sort of peck through these fairly quickly, and it pertains to online. So – and we have trouble getting our hands on the data.

Where is AmazonBasics relative to Energizer's 24% market share that you cited? Where are you taking market share? You mentioned you're up 5 points year-over-year. Where is that coming from? What is online now as a percent of the battery category in the U.S.? I'll take a stab at this.

Anything you can update us on with respect to the AmazonBasics supplier contract, even broad brushstrokes in terms of when that may be coming up for bid? And then, Alan, broadly, anything you'd mention with respect to learnings online with consumer behavior, demand elasticities, et cetera? So, thanks for all that..

Sure..

All right, Kevin. Yeah. I think I have answers to all of those. So, overall, again, we've mentioned the category is up 30% online. Energizer grew 66% over that same time period and actually outpaced AmazonBasics, which grew at 59%. We settled in at a share of 24%, which you've mentioned. Amazon is at 29%. Duracell is at 12%.

Percentage of the category that's going through e-commerce, to update those numbers, it's 10% tracked and it's about 7% of tracked and untracked. Still roughly 95% of the sales goes through Amazon. Basics is sitting in the overall battery category at roughly a 2.9%.

Anything I missed on that one, Kevin?.

No. That was very helpful. And then the other one, I guess, probably for Alan or, Mark, you can jump in, too. Any update on the AmazonBasics supplier contract, even broad brushstrokes in terms of when they comes up for bid. I suspect you guys would be very interested in it.

And then also any learnings with respect to consumer behavior online, demand elasticities, et cetera..

So, I can start that and Alan can fill in where I miss. In terms of the private label contract with Amazon, I'll leave it to them to answer that question. Obviously, if retailers want to engage in a private label discussion, we're happy to have it.

As we've described our private label strategy in the past, we generally engage with that in a way that it will advantage our brands. But to the extent Amazon wants to have a discussion about a private label contract, we would treat it the same way we do with other retailers.

In terms of learnings online, I mean obviously consumers are engaging with the category in different ways, depending upon the demographics. A lot of this is leading in the U.S.

You also see some pockets in Europe with the UK and France and Germany where some of the consumer behaviors are changing ahead of some of the more traditional markets that you would see in other parts of the world. So, that does tend to be a modern developed market phenomenon.

But there are learnings that you can have in terms of how do you engage with them both from digital advertising, how do you get them, what are the pack sizes, what are the SKUs, what are the pain points that consumers are experiencing.

We do have a dedicated team that's constantly mining that data, applying that in the U.S., seeing if it applies in international markets and applying it there as well..

And the only add I'd have, Kevin, is we're using a lot of data analytics within that team, look at how we continue to drive, increase conversion, and maximize the ROI on our investments online.

Beyond that, I'm probably going to hesitate to have the team share too much more for competitive reasons because we'd like to use those as we continue to build our relationship and grow with Amazon..

Understood. Thanks for all the time, guys. Good luck..

Thanks, Kevin..

Thanks, Kevin..

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

Great. Thanks. Good morning. Just want to follow-up actually on online and Amazon. It's great to see that you're outpacing AmazonBasics online.

Why do you think that's the case? And how long do you think you can – how sustainable do you think that growth is to be outpacing them? And can you talk through the incremental spending that you've done to support that growth both potentially above and below the net revenue line? Thank you..

Yeah. So, this is Mark. I'll kick that off. I think what we're doing is just making sure that we get the content and visibility and the pack size and that we're engaging consumers in a way that impacts their purchase intent online, which is a little bit different than what you do in brick-and-mortar.

As we've talked about in the past, there are investments that you need to make. You need to make investments on the visibility. You need to make investments on search. Those are different than the investments you make in brick-and-mortar.

But from a net bottom line profitability, we're agnostic because, again, the composition of the spend is different but you end up in roughly the same place. In terms of our success, again, I would say it's getting back to the basics in terms of content visibility and search.

And then you create a momentum online where that actually enhances your visibility that they see online and that allows consumers to engage more easily and more readily than they have previously. I think in terms of overall our ability to outpace growth in the category, that's certainly our intent.

That's what we've challenged the team to do without knowing what AmazonBasics or Duracell or some of the other competition will do online. We know that we have our work cut out for us, but we think our team is up to the task to continue the great momentum they have..

Got it. Thanks. And then in terms of the outlook, just wanted to talk about the ranges. First on organic sales, obviously a fairly wide range which at the low end of low-single-digits would clearly imply a low-single-digit decline. So, just understanding the realm of possibility for Q4.

I would imagine that you're not looking for a low-single-digit decline, but it's certainly something that would be within the realm of possibility based on your full year outlook. And then on EPS, in the last few years, you've historically narrowed the EPS range.

So, why the decision to sort of keep it at a wider range at this point, and can you talk through kind of what gets you to either end of that range?.

Yeah. Olivia, as we move into the fourth quarter, I think, the thing that you're going to have to take into account is we're lapping the hurricane activity last year and distribution that we had last year.

So, as we go into the fourth quarter, you will see a slight decline in organic as we're lapping that hurricane activity, because our current year does not include any activity for potential storm activity that may occur this year. So, that does get us to the low-single-digit organic revenue growth for the full year.

Relative to the range, the reason we've kept the range where it is, is just as we moved into this quarter and as we look forward, currencies have been moving, and as I called out in the prepared remarks, a fairly significant movement.

So, we're maintaining the range that we had before and we think that is prudent, but we are maintaining our outlook despite the headwinds that we've incurred..

Great. Thank you..

Thanks..

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

Good morning. When you were talking about being locked in on 60% of your products for 2019, you mentioned that they were at higher levels, but you didn't say how much higher, either as a percentage or on a dollar basis.

Can you give us any more color there in terms of what those prices look like?.

Yeah. So, in terms of our input costs, that's what we've called out, that we locked in on more than 60% of our raw material input costs. We haven't quantified what that impact is. We'll provide that as part of our full outlook for fiscal year 2019.

And, again, I want to maintain that we provide the full outlook on 2019 and not just component parts of that..

Okay. That makes sense. And then just one more. Obviously, you guys have your hands full with the Spectrum Brands acquisition. In terms of innovation, I'm sure you're continuing to work on that.

How do you feel about your pipeline of innovation for next year, and how would you say that compares maybe to the last handful of years?.

I think our innovation pipeline is in as strong of a position as it has been in a number of years. We feel really good about our innovation pipeline. Obviously, it's something we can't discuss and reveal until the products have been presented and accepted with our customers.

But both batteries, lights, and auto care have a really robust R&D and marketing pipeline that put us in a really, really good position as we go on under additional line reviews in the future. So, we feel really, really good about where we are..

Great. I'll pass to others. Thank you..

Thank you..

Thank you..

And our next question comes from Steve Strycula with UBS. Please go ahead..

Hi. Good morning. Two-part question. So, first on the synergies, wanted to get some clarity for the $80 million to $100 million. Is that a net number of reinvestment spend, or is that a gross cost savings number? That'd be the first part of my question. Thanks..

Yeah. That's a gross number, the $80 million to $100 million and then the cost we indicated to achieve that 1 to 1.25 times..

Okay. Great. Because we were just trying to think about what the accretion number you would be implying off of that $80 million to $100 million, like how much is price reinvestment, other type of considerations as you kind of think about our models building that. So, anything else there would be helpful.

And then the second part would be, when I went through the debt filing, I noticed that the trailing 12-month results for Spectrum, the EBITDA run rate was lower than it was from last year.

Is that reflective of higher logistics costs? Is it the revenue share loss that we're seeing maybe right now? Any additional color or language would be helpful from the way that that was put in the document. Thank you..

Yeah. So, the decline in the latest 12 months you see that there's really two factors that were driving that decline. One is, they launched a new hearing aid product. And with that, there was investment associated with that. So, they did a hard launch on that rather than a soft launch, so they took product back in.

And so, that's reflected in the first half of fiscal year 2018. You'll see the benefits of that launch as they move throughout this year and beyond. So, that actually benefits us as we move half the closing. The additional factor that was impacting them was increased commodity costs. And so, those are reflected in that latest 12 months..

Okay. And then quick follow-up question on the non-U.S. part of the battery business. Can you just give us a quick fly over continent-by-continent as to what the battery dynamic is in some of those regions in terms of premium price points versus call it value? My understanding is that a lot of the non-U.S. markets are lower-gross margin in nature.

And just for understanding, is there an opportunity to step up the brand and component in some those markets structurally? I guess where is the puck going versus where it is today in some of those regions? Thank you..

Malaysia, Australia and New Zealand. Many of those markets, for decades, we've been leveraging that dual-brand strategy. Our expectation is that with the broader portfolio going forward, we'll be able to offer consumers a much broader portfolio to be able to meet their needs and wants across both our battery and portable lighting businesses.

We anticipate that will continue going forward. We see the strength and the need for that, both from a business standpoint and from a consumer perspective. You can anticipate that will continue..

Yeah. And if you look at the dynamic as you go around the globe and specifically private labels, so, if you look at globally, private label is roughly a 17% share. If you focus on North America, it's approximately a 12% share. As you move to Europe, private label becomes a larger component of the overall category with it being in excess of a 30% share.

If you look at LatAm, it's less – roughly a 5% share. And in Asia, it's roughly a 6% share. So, higher level of private label in Europe.

So you see that dynamic, and we've historically talked about pricing ladders that exist between premium branded products and private label, but you do see that interaction between those, the premium brands and private label..

Okay. Thank you..

Thanks..

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

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

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