Energizer Holdings Inc

NYSE:ENR

Earnings Call Transcript 2018-Q1

[Operator]

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

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

[Jacqueline Burwitz, Vice President, Investor Relations.]

Good morning and thank you for joining us. During the call, we will discuss our results for the first quarter of fiscal 2018 and update our outlook for the remainder of the year. 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. 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 net 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'd like to turn call over to Alan.

[Alan Hoskins, Chief Executive Officer.]

Thanks, Jackie, and good morning, everyone. This is an incredibly exciting time for Energizer and our shareholder both in terms of our core business and as we announced earlier this month with the acquisition of the battery and portable lightning business from Spectrum.

Over the past two and a half years you had seen the results that our team has delivered. By adding [Indiscernible] brands and associated colleagues and manufacture account sets, we believe we’ll be very well positioned to compete in the battery category in the years ahead.

Now, if you look at the quarter’s performance in the critical holiday season. Our team once again achieved strong results across the board behind our strategic initiatives of leading with innovation operating with excellence and driving productivity.

The team delivered adjusted earnings per share of $1.55 compared with $1.51 in the year ago quarter. These solid results were driven by organic revenue growth, steady gross margins, share repurchase and a lower effective tax rate due to recently enacted U.S. Tax Legislation.

We delivered organic growth of 1.1% which is impressive in light of the strong 7% growth the team delivered in the prior year quarter. This growth was achieved through pricing across several markets as well as the successful implementation of our portfolio optimization, which increases the availability and accessibility of our Ultimate Lithium Batteries, the world’s longest lasting AA battery.

We expect to continue seeing the benefits from the portfolio optimization change over the remainder of fiscal 2018. As we gain consumer acceptance of our repositioned offerings. And importantly, we achieved these sales gains while holding our gross margin flat versus prior year.

Turning to global category trends, value and volume were up 5.6% and 2.4% respectively. The improved value performance was driven by hurricane activity as well as increased pricing.

Excluding the impact of hurricanes, category value increased 2.9% [ph] and volume was flat. As we indicated in last quarter’s prepared remarks, Energizer’s market share moderated in the quarter in line with our guidance. Global value share of 35.1 declined 50 basis points in the latest 13-week data, and the U.S. share of 35.2 was down 80 basis points.

We saw a strong performance in several untracked channels, including home center and e-commerce. Looking more specifically to e-commerce, which is a strategic priority for us, we saw a 2.9% value share gain in the channel to a 20.3% share and we continue to be the branded share leader in this fast-growing channel.

The success we are experiencing in e-commerce is the result of dedicated investments in our team and strategy, focused on both winning in brick-and-mortar retailers with their omni-channel strategies as well as growing our business with pure play online retailers.

To reiterate, our primary focus is maximizing free cash flow and market shares and output from focusing on core category fundamentals and operating with excellence through a superior in-store and online execution.

We have continued to grow our business behind our three strategic priorities, but leading with innovation, operating with excellence and driving productivity. In this holiday season, we launched innovation behind our core [Indiscernible] offer introducing our best-performing Energizer MAX ever.

And our innovation pipeline continues to be strong across our business, as we continue to invest behind both product performance and improve consumer experiences. In regard to operating with excellence, we continue to see the benefits of our pricing and portfolio optimization actions across the globe.

As we fully integrated the auto care business last year, we are now focused on laying out and executing detailed plans to expand our international auto care business. In the international, we are eliminating lower margins skews to focus on a core offering that will drive our top line and margin performance.

We are also further integrating business processes in our international supply chain to leverage our existing capabilities to deliver improved availability in support of our goal of doubling our international sales by fiscal 2020.

Customer reactions have been very positive and we remain committed to investing in and expanding our auto care footprint. And finally, we are driving productivity through our continuous improvement initiatives.

Previous productivity initiatives focused on product cost have enabled us to hold gross margin flat, while the current charges of approximately 11 million in this quarter are targeted more toward SG&A improvement.

We expect the current investments will result in lower SG&A as a percent of sales in the back half of fiscal 2018 and beyond, a key focus of our management team.

We continued to take a balanced approach to capital allocation as well. There are four pillars to our balanced approach to capital allocation. Reinvesting the business to strengthen our core, paying a meaningful dividend, opportunistically repurchasing shares and strategic M&A.

First, we remain committed to investing and strengthening our base business through innovation and productivity improvements. I’ve talked about a number of those initiatives today and we have a great pipeline of investments that we will continue to pursue supported by strong copy and investment in shopper activation as well as continuous improvement in our business operations.

We also continue to reward shareholders for meaningful capital returns. In the quarter, we returned cash to shareholders through both an increased dividend of $0.29 per share, a 5% increase over last year, and the repurchase of 1.1 million shares at an average price of $44.41 in the quarter. Together, this represents roughly $68 million in total capital returned to shareholders during the quarter.

And finally, we announced on January 16 that we’ve agreed to acquire Spectrum brands global battery and portable lighting business, including the VARTA and Rayovac brands for $2 billion. This combination will expand Energizers presence in a number of international markets on Energizers product portfolio and manufacturing capabilities, and increased capacity for research and development.

This will also enable customers and consumers to benefit from accelerated innovation and a wider range of products and provide the opportunity to drive cost-efficiencies to enhance our capability to compete in the category. We have begun the process of making regulatory filings around the world including our HSR filing in the U.S. which we made on January 25 and we expect to complete the transaction by the end of the calendar year.

Looking forward to the remainder of fiscal 2018, in light of the positive impacts of topline growth and expected margin performance, share repurchases and the U.S. tax reform. We are increasing our outlook range for full-year adjusted earnings per share to $3.30 to $3.40, a 10% increase from our previous guidance.

Our teams continued to deliver strong operational performance in our based business, and we are currently expecting organic revenue growth to be up low single digits for the full year, coupled with foreign currency tailwinds for our business.

In addition, we are very excited about the opportunities the acquisition of Spectrums battery and portable lighting business provides us. Now I’ll turn the call over to Tim for a review of the financial results as well as more detail behind our updated financial outlook for fiscal 2018. Tim?

[Tim Gorman, Chief Financial Officer.]

Thanks Alan and good morning everyone. I’ll discuss the financial results for the first quarter including providing detail on net sales and gross margins in the quarter. I will also walk through the details of our income statement and other metrics. Finally, I’ll provide an update to our outlook for fiscal year 2018.

For the quarter, adjusted earnings per share was $1.55 versus $1.51 in the prior year first quarter. The current quarter includes a benefit of $0.10 relating to the recently enacted U.S. tax legislation and $0.03 from share repurchase, including $0.02 attributed to the share repurchases made in the fourth quarter of fiscal 2017, which was included in our original outlook.

These amounts were offset by spending related to the previously communicated productivity initiatives which include improving our supply chain organization, further optimization of our manufacturing footprint, simplifying and streamlining our organization and business processes and continuing to ramp up investments in our e-commerce capabilities.

Total net sales for the quarter increased $13.7 million or 2.4% to $573 million. Excluding favorable currency of approximately $8 million organic revenue was up 1.1%. The increase in [Indiscernible] sales was attributable to the following components; 3% from favorable pricing actions across several markets, and 0.5% from investments in our portfolio optimization made in the back half of fiscal 2017.

These amounts were partially offset by retailer merchandising changes in the U.S., lapping of storm volume in the prior year first quarter, and the May 2017 divestiture of the noncore promotional sales business acquired with the auto care business.

We expect the retailer merchandising changes to be fully lapped by the end of the second quarter. Looking at revenues by geography, we experienced organic sales growth in the Americas and Asia Pacific. In the Americas, organic net revenues were up 2% due primarily to the price increases and favorable impact, favorable net impact of our portfolio optimization with our lithium sales and volume up approximately 60% and 100% respectively.

These amounts were partially offset by retail merchandising changes, hurricane volumes in the prior year first quarter, and the sale of the ASI business. In Asia Pacific, organic net revenues increased 2.1% due primarily to price increases taken in several markets.

In EMEA, organic net revenues decreased 2.6% driven by the shift of holiday orders into the fourth quarter of fiscal 2017. Before turning to the rest of the P&L, I also wanted to mention that based on historical trends, we exited the first quarter with slightly elevated retail and inventory levels which we expect to normalize during the second quarter.

Gross margin was 48.5% in the first quarter, flat in the prior year. Continued benefits from improved pricing and favorable impact of foreign currency were primarily offset by less favorable absorption versus the prior year, and investments made in continuous improvement initiatives.

A&P as a percent of net sales was 6.5%, an increase of 40 basis points compared to the prior year first quarter, primarily in support of initiatives and holiday programs. As we discussed on last quarter's call, this increase was expected as our full year spend will be more balanced throughout the current fiscal year.

SG&A spending, excluding acquisition and integration costs, was $96.5 million or 16.3% as a percent of sales in the current quarter, up 140 basis point compared to the prior year first quarter.

On an absolute dollar basis, SG&A increased $9.9 million due to our current year investments and our continuous improvement initiatives which were approximately $9 million in the current quarter.

As I mentioned last quarter, the spending behind this initiatives will be more predominant in the first half of the fiscal 2018 with the majority of the savings realized in the second half. With respect to SG&A, I would also like to point out that a new accounting standard impacted our classification of pension related costs. The new standard now requires pension financing cost to be reported in other items that which resulted in a reclassification of pension credit from prior year SG&A to other items net in the amount of $3.1 million.

This resulted in increased SG&A cost reflected in our fiscal 2017. As a result of this new accounting standard, we have made clarifications to the prior year first quarter to be compared it to the current year classification. We will be making similar reclassifications in each quarter over the balance of the year.

The pension reclass 4 [ph] resulted in an increase in prior year SG&A of approximately $3 million in each of the next three quarters. These increases will be fully offset by reductions in other items net on our income statement.

Our ex-unusual effective tax rate for the first quarter was 23.4% compared to 28.8% in the prior year quarter. The decrease in the rate is driven by the new U.S. tax legislation and takes into account the new steps for U.S. tax rate that is now effective for fiscal year 2018.

I would like to point out that the reported rate of 49.2% includes $31 million charge or the one-time impact primarily related to the transitional tax on foreign earnings required by the newly enacted tax legislation.

Looking at our balance sheet, we ended the quarter with $454 million in cash with substantially all of it held offshore. Our debt level at the end of the quarter was approximately $1.1 billion essentially unchanged from last quarter, and we maintained our debt to EBITDA at roughly 2.9 times on a trailing 12-month basis.

We generated free cash flow of $136 million in the current quarter compared to $91 million in the prior year first quarter, with the increase primarily related to improvements in working capital.

In the quarter we paid a dividend of $17.6 million and repurchased 1.1 million shares of common stock with $50 million or an average price of $44.41. In addition, as Alan mentioned we announced our agreement to acquire Spectrum brands global battery and portable lighting business. As always we will continue to take a balanced approach to the capital allocation by investing in our business to support long-term growth, returning capital to our shareholders through a meaningful and opportunistic share repurchases, and finally pursuing M&A opportunities that are the right fit for Energizer.

I think our actions this quarter more than support our commitment to pursuing a balanced approach in our capital allocation and our focus on driving and building long-term shareholder value.

Now, turning to our outlook for fiscal year 2018, as Alan mentioned earlier in his remarks, we have increased our adjusted earnings per share outlook from the original range of $3 to $3.10 for the new range of $3.30 to $3.40. Approximately $20 million of this updated range takes into account the impact of the new tax legislation passed in December 2017 with another $0.04 attributable to the share repurchases we made this quarter. And finally $0.06 attributable to the underlying business performance.

Net sales on a reported basis are expected to be up low single digits. Organic net sales are also expected to be up low single digits including lapping the impact of hurricane activity of approximately $26 million and lapping distribution gains for fiscal year 2017.

The organic net sales growth is primarily driven by the increased pricing actions across the globe and the favourable impacts of the portfolio optimization

Favorable movements in foreign currency are expected to benefit net sales by 1% to 1.5% based on current rates. Our gross margin rate is expected to improve 50 basis points versus fiscal 2017. This is an improvement of 50 basis points over the outlook provided in November 2017 and is driven primarily by productivity improvements. This is net of rising commodities and the cost of continuous improvement associated with optimizing our manufacturing footprint.

With respect to key commodity cost, we are approximately 85% covered on our expected requirements for fiscal 2018. A&P spending is expected to be in the range of 6% to 7% of net sales consistent with our long-term outlook. Again, I want to remind you that the timing of the A&P spending during fiscal year 2018 will be different than the timing of the current fiscal 2017 where the spend was weighted more to the back half.

We expect A&P will be more balanced across the fiscal year resulting in higher spend of about $4 million to $6 million in each of the next two quarters offset by lower spending in the fourth quarter.

SG&A as a percent of net sales is expected to be flat on a year-over-year basis, excluding acquisition and integration cost, however the timing of SG&A costs will not be evenly spread throughout the year.

As I mentioned on last quarter’s call, we will continue to make investments during fiscal 2018 to simplify and streamline our organization and business processes, and continue to ramp up investments in our e-commerce capabilities.

In the first quarter, approximately $90 million was included in the SG&A. We expect additional cost of $2 million per quarter to be reflected in each of the next three quarters. While these costs be offset by expected savings, the majority of the savings are expected to occur during the second half of the year.

Pretax income is expected be favorably impacted by the movement of foreign currencies of $5 million to $10 million net of hedge impacts based on current rates.

Our ex-unusual income tax rate is now expected to be in the range of 23% to 25% taking into account the impact related to the new U.S. tax legislation passed in December in our current expected country mix of earnings.

Our expectation for capital spending remain unchanged in the range of $30 million to $35 million and we continue to expect depreciation and amortization to be in the range of $40 million to $50 million.

Free cash flow is now expected to be in the range of $240 million to $250 million. In addition to the impact of U.S. tax legislation, the increase includes the benefits associated with improved working capital and a revised gross margin expectations.

As a reminder, fiscal year 2017 free cash flow included significant asset sale benefits that will not be repeated in fiscal year 2018. I indicated on last quarter’s call that based upon both the phasing of A&P spending and the timing of investment spending, that our adjusted EBITDA expectations for the first half of the year would be down.

At that time, I indicated we expected adjusted EBIT for the first quarter to be down 5% to 10%. Actual first quarter adjusted EBIT was down 6%. For the second quarter, I indicated we expected adjusted EBIT to be down 10% to 15% and we now expect it to be near the upper end of that range.

The lower performance in the first half of the year will be more than offset by improved adjusted EBIT growth in the second half of the year due to the A&P phasing and as we begin to realize savings from our continuous improvement initiatives.

Full year adjusted EBIT is expected to increase on a year-over-year basis up mid-single digits. To reiterate the confidence in delivering our fiscal year 2018 results, the following are the key headlines from our outlook. Low single digit organic sales growth, adjusted earnings per share of $3.30 to $3.40 and free cash flow up $240 million to $250 million.

Now I would like to turn the call back over to Alan for closing remarks.

[Alan Hoskins, Chief Executive Officer.]

Thanks, Tim. Fiscal 2018 is shaping up to be an exciting year for Energizer as our business continues to grow, and we work towards closing and integrating Spectrums battery and portable lighting business. We believe that we have created a foundation for continued success, we are excited about the opportunities ahead of us, and we remain focused on delivering value for shareholders.

Operator at this point we can open it up for Q&A.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Bill Chappell with SunTrust. Please go ahead.

[Bill Chappell, SunTrust]

Thanks. Good morning.

[Alan Hoskins, Chief Executive Officer.]

Good morning, Bill.

[Bill Chappell, SunTrust]

Can you just give a bit more color on retail merchandising activities that impacted the quarter? Is this inventory destock as we’ve seen elsewhere or maybe what else what it would have been?

[Mark LaVigne, Chief Operating Officer.]

So, I think from an overall perspective, Bill, this is Mark. What Tim was referencing is last year in our first quarter we had a shift from Q2 into Q1 which elevated our sales and impacted our overall Q2. From a retail execution perspective you are seeing some different shelf sets, and we expect to roll off that comp in Q2, at the end of Q2. And when retailers reset their set, we’ll see a shift in some of the shares as well. So the sales and the share tend to lag each other.

[Bill Chappell, SunTrust]

Okay. And then just on the gross margin standpoint, maybe I might have missed it, but the outlook on commodities as oil has come up and where you stand for this fiscal year and whether you might need pricing going into next year as well?

[Mark LaVigne, Chief Operating Officer.]

Yes. So, Bill, as I mentioned for this year we’re 85% covered and so we’re comfortable for this year obviously in terms of pricing we assess on a global basis market by market and we’ll take actions where we see opportunities.

[Bill Chappell, SunTrust]

Okay. And then last one from me. On international cash should we assume that with Spectrum battery business that you can use that cash for that part of the deal and so there probably no repatriation anytime near-term?

[Tim Gorman, Chief Financial Officer.]

That’s correct. We indicated on the call on the 16th the assumption was about 250 million, I’d take that based on where the cash position sits right now and probably that number would be slightly higher than that probably in the $300 million to $350 million.

[Bill Chappell, SunTrust]

Got it. Thanks so much.

[Tim Gorman, Chief Financial Officer.]

Thanks, Bill.

[Operator]

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

[Wendy Nicholson, Citi Research]

Hi. I just to first ask a follow-up, Mark in terms of the answer to the question that Bill ask about the shelf resets, you said that the market shares will respond as their shelf reset are down. So is that a net positive for you on so the market share loss we saw in the first quarter. Do you think that will abate or lessen as we into the second and third quarter? Is that what I heard?

[Mark LaVigne, Chief Operating Officer.]

So, Wendy, I'll unpack that a little bit. Obviously when shelf resets are done you see sort of a pipeline fill. You’ll see a lap of any lost space. And then you'll see the sales respond on any game space. In a net positive, I mean, we constantly are dealing with sets that are being reset. And so from an overall perspective I don't think you'll see a meaningful movement to the rest of the year from the shelf set perspective. But just to keep in mind the Nielsen numbers always lag our financial metrics and I think that’s what I was trying to get to in terms of the overall.

And we’re going to end up lapping, the ones that we called out in our prepared remarks, we’re going to lap that at the end of Q2. So you’re going to see that negative drop off at the end of Q2. So you’ll see a net positive back going forward.

[Wendy Nicholson, Citi Research]

Got it. Okay. That’s helpful. Thank you. But now my other two questions are number one, it seems to be -- at least I still get a lot of questions on the antitrust outlook regarding the acquisition, I know it’s only been few weeks since you announced the deal, but can you give us any update in terms of conversations you’re having with the regulators? How you’re thinking about that, odds of closing, etcetera, etcetera.

And then my second question is just, with regard to the online business can you just talk generally about sort of the cost of doing business on some of the pure-play site. Do you see any increase in that? Is that becoming more competitive, and the cost of paid search or whatnot, just the relative profitability of that business? That would great. Thank you.

[Alan Hoskins, Chief Executive Officer.]

Wendy, it’s Alan. Just to kick-off, as you know, we just completed our HSR filing. So we’re done. And I’ll let Mark speak to the antitrust and then also regarding the e-commerce progress.

[Mark LaVigne, Chief Operating Officer.]

Yes. Wendy, its Mark. I think from an overall perspective, no new news for us to provide today on the regulatory filings. We are – we’ve made the filings in the U.S. We’ll make filings in the international jurisdictions. It’s an early days yet. We expect continue the dialogue with regulators. I don't think, I want to get into how those conversations are going. At this point we’re still calling -- closing by the end of the calendar year. And I wouldn't expect meaningful updates maybe until the coming quarters just because it takes a while for those conversations that take place and for us to understand the path forward.

So right now I think what we said before is its still good in terms of the end of the calendar year and when and if we have a material update to that we’ll provide an update, but I wouldn't expect it in the near term. From an e-commerce perspective, I mean, in terms of the cost of doing business. We’re agnostic in terms of whether we sell on store. We sell online. We make sure we partner with the retailers regardless of the point-of-purchase. You do see the cost change, I means, where you will see merchandising and display costs in store you'll see search and content cost online.

And as of now we’re not seeing erosion in terms of when you go from brick-and-mortar online. And so that helps us to be channel-agnostic and it helps us lean in, but we do have to be cognizant that the money we’re spending and the costs we’re incurring are different than what you see in-store.

[Wendy Nicholson, Citi Research]

Got it. That’s all. Very helpful. Thanks so much.

[Mark LaVigne, Chief Operating Officer.]

Thank you, Wendy.

[Operator]

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

[Kevin Grundy, Jefferies]

Thank you. Good morning, guys.

[Mark LaVigne, Chief Operating Officer.]

Good morning, Kevin.

[Kevin Grundy, Jefferies]

I want to pick up on Spectrum brands there. Alan, can you talk about the retailer and supplier response to the deal; number one. And then I just number two; how does it change the way you compete if at all, because it’s a bit precarious, right? It's still a competitor until the deal closes and there’s some uncertainty that it will. So maybe talk about sort of balancing that. Is a competitor for the time being and then hopefully a brand that you’ll own looking out over the next 12 months?

[Alan Hoskins, Chief Executive Officer.]

Yes. So let me just address first that as we’ve indicated in the past, its business as usual. We remain squarely focus on our three strategic priorities to wining the category and serve our customers and consumers better than anyone else. And that remain squarely our focus as an organization going forward. I don't suspect, Kevin, you'll see that change between now and the time of close.

In terms of discussions that are occurring as you would imagine there's a significant level of communication that occurs at multiple levels of our organization across all constituents, including colleagues. That has been undertaken over the course of the last two weeks. It’s completed. And that will continue to progress as we move forward through the next two, three quarters.

[Kevin Grundy, Jefferies]

Alan, is that view favorable or unfavorable from retailers and suppliers at this point with respect to the deal?

[Alan Hoskins, Chief Executive Officer.]

Yes. So, as you would imagine given the process that we’re in, we’re not in the position to comment on those discussions. We’re pleased with the progress that we’re making and we’re going to remain squarely focus on continuing that communication over the next three quarters.

[Kevin Grundy, Jefferies]

Okay. Fair enough. And then two more quick one from me, and I apologize if I miss this. Tim, on the FX outlook the dollars weaken but the guidance is unchanged. Can you comment on that?

[Tim Gorman, Chief Financial Officer.]

Yes. So Kevin, we provided a range. So as you look at that range we’re turning towards the higher end of the range we broadened on last quarter call. And so reflective of what we’ve seen recently in the movements in the rates.

[Operator]

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

[Faiza Alwy, Deutsche Bank]

Yes. Hi. Good morning.

[Tim Gorman, Chief Financial Officer.]

Good morning.

[Faiza Alwy, Deutsche Bank]

So, firstly, just the question on the update on the gross margin guidance, could you expand a little bit on the productivity initiative. Give us a bit more color. And then if there is any change as it relates to trade spending that maybe part of this gross margin guidance.

And then just my second question is, just to follow-up on the Spectrum antitrust. So I understand that you don’t want to comment on antitrust per say, but it seems to be that there is a large OEM battery market that’s an addition to the retail market that could be taken into account by regulators as they assess the deal. So if you can say whether you agree with that or not that would be great. But the question is could you maybe frame for us the size of the OEM market and your combined share in that market versus the retail market, and if you could focus your comment on the U.S. and Germany that would be very helpful? Thanks.

[Alan Hoskins, Chief Executive Officer.]

Thanks, Faiza. So I’ll have Tim start on the gross margin guidance and then Mark and I chime in on both the OEM and antitrust piece as well.

[Tim Gorman, Chief Financial Officer.]

Yes. So relative to the updated gross margin rate we’re just seeing the stronger benefits from productivity initiatives that we’ve executed last year and then what we’re executing this year. And in terms of the timing being accelerated on realizing those benefits, so that’s what driving 50 basis points. And as I mentioned you we’re strongly covered on commodities, so while we’ve seen a slight spike up commodity cost we’re covered on that and that’s reflected in our outlook. So we’re comfortable revised rate we’ve provided.

[Alan Hoskins, Chief Executive Officer.]

And then just very briefly on OEM, I’ll give you headline and ask Mark to jump in. So the way to think about OEM, it is a strategic -- one of our strategic initiatives within the organization. We work very closely with device manufacturers in the Orient. And this is really important in particular given the growth that we’re seeing in the Internet of Things and in a new class of devices that are emerging. In fact that we’re seeing a miniaturization of devices that requires much smaller cell sizes such as AAA and specialty.

And then finally we’re seeing demographics shifts. So think about an aging population that is in both in developed and developing markets and that’s going to require increased use of specialty, as well as hearing aid batteries in the future. Our objective what our team on the ground does, they work very closely with those OEM partners certainly on a revenue standpoint, we’ve not share that number externally just so you're aware, but they do work with them on those emerging trends, its actually plays well into our portfolio strength given our strength both in the premium, the lithium and the specialty segments. And then Mark, any adds

[Mark LaVigne, Chief Operating Officer.]

Yes. From a question on OEM as it related to Spectrum, I think from an overall perspective and I know it's frustrating because everyone wants more information that we’re able to get at this point, but we’re continuing to go through the regulatory process. We don't expect any major hurdles to get the regular approval process by the end of the calendar year. In terms of decomposing their business against dollars, I think what we’re going to do is allow those conversations to continue with the regulators and what that play out over the course of the next couple of months.

[Faiza Alwy, Deutsche Bank]

And then, the last question you have is regarding trades. I guess the quick headlines I gave to is, we’ve invested dedicated resources in that particular area as part of our productivity improvements. We really started by installing a North America team which we did at the time of spend. Their primary focus was really in three core areas providing clear visibility and analytics on our trade investments, they were very attentive and responsible for governing all of our trade spending behaviors and optimizing our trade spending.

Since that time we’ve invested in tools and technology to support the resources and we continue to work with our retail partners in the number ways. Let me just give you an example. In our annual planning with retailers we sit with them and schedule a number of promotional and merchandising activities that occur throughout the year.

Our teams use these analytics and information to work with the partners, identify less efficient activities and they work with the retail and redirect goes to better ROI type events. As a result we’re seeing and working toward driving a sustainable growth, as opposed to renting share for us. Share is really a byproduct of focusing on the focusing on the core category fundamentals of visibility availability. We use the trade investments initiative to really look at that acquired spending to support our retailers trade activities and strategy activities around promotion and maximizing those.

We've seen benefits from that. Its help drive our top line sales. Its improved overall profitability and we've seen a growth in our pay share because of that redirection back into those core fundamentals. So, this remains a priority for us. Its embedded in the way we operate and it's really more about redirecting investments to better ROI activities.

[Operator]

Our next question comes from Jason English with Goldman Sachs. Please go ahead.

[Jason English, Goldman Sachs]

Hey, good morning, guys. Thank you for [Indiscernible] question. I have two questions and sorry, I got a bit distracted in one of your responses to another question. And I think you kind of touch on this, but I love for you to expound. Volume for the category in aggregate, it sounds like best estimate, if I just aggregate some of the hurricane. I think global you said, we’re kind of tracking flattish. And certainly what we see in the U.S. is has been relatively upbeat relative to history. Do you think we may be sort of a sustainable inflexion with category stabilizing and sort of precipitous decline that we've lived through for the last almost decade kind of stalling out as we have reached a saturation point on many of these devices that have displaced others battery using devices?

[Tim Gorman, Chief Financial Officer.]

Yes. It’s a great question Jason. So I think the headline would be that we remain consistent on our outlook for the category to flat down low single digits, but again I do want to emphasize that there is potential opportunity to improve that outlook, and it’s really contingent on a number of things. So the big headline would be as we have seen stabilization in the device universe. That continued stabilization of devices you would expect would continue as the conversion to battery onboard has matured. We do know that.

And there is a direct correlation between the stabilization in the device population and category volume. The upside too flat to down low single digits really comes in three areas; first the growth of the Internet of Things. That’s going to create a whole new class of devices that’s going to require more primary power from both round cell batteries like AA and AAA as well as specialty type batteries, so that’s sort of one area.

And think about that in the space of smart home, smart health and connected devices. The second is this continued miniaturization of devices. We’re seeing that in both developed and developing market across several device classifications and we expect that that’s going to drive an increase in smaller cell sizes such as AAA and specialty. And then finally this demographic shift, think about it both in terms of the Internet of Things, so we smart health devices that are going to require primary power.

And you’ve got an aging population. There is a greater awareness of binaural and hearing a loss and usage, greater adoption and usage of hearing aids. And we think that bodes well for the growth of the hearing aid segment in the category going forward: So those four things really would argue that there is potential upside to our outlook but we’re holding to our outlook given the trends that we’ve seen over the last several years.

[Mark LaVigne, Chief Operating Officer.]

And just a reminder Jason, our outlook does not include any activity related to hurricane. So as you recall in fourth quarter last year we had a $26 million benefits associated with hurricanes. Currently, we don't have anything reflected in the forecase.

[Alan Hoskins, Chief Executive Officer.]

Yes. Your volume base is really driven by devices, demographics and disasters changes to address, but the latter and I address that the two former. And that’s really what’s going to impact volume.

[Jason English, Goldman Sachs]

Sure, sure. Thank you for that. My second question relates to the 2Q, if I heard you right you’ve kind of guided to EBITDA down almost 15% year on year, but you walk through a lot of the puts and takes. You walk through the fact that sales are depressed in the second quarter last year because inventory shifts as you could bit of a pump on that. Their SG&A moves up, but I think you said it’s only $2 million which is certainly less than we saw on the first quarter.

And then, as we look at FX it looks like it’s the magnitude tailwind is the largest in the second quarter, a bit larger than the first quarter. So, when I stack and rack all those puts and takes, I have a really hard time understanding how EBIT could be down that much, so clearly I missing something. What do I miss?

[Alan Hoskins, Chief Executive Officer.]

Yes. So within gross margin we always have investments we’re making and continuous improvement, manufacturing footprint changes as well as those investments I called out the A&P phasing this year versus last year, so $4 million to $6 million on that. We called out the incremental $2 million on SG&A investments. So those are all of the drivers that are driving the topline or the adjusted EBIT performance.

The other thing I mentioned, we have slightly elevated retail inventory level coming out of Q1, so there will be a modest deload in Q2, not in the magnitude that we saw last year but you really have to factor that in as well.

[Operator]

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

[Jason Gere, KeyBanc Capital Markets]

Okay. Thanks. And then I guess the first question I was going to ask is, you talked about the holiday sales being I guess within your expectations and the share loss. Can you just maybe flushed out what you saw from a competitive landscape maybe even private label other brands including Amazon what you saw in this quarter maybe versus what you saw in the September quarter. And then I have a follow-up.

[Mark LaVigne, Chief Operating Officer.]

So, I’ll pick this up. This is Mark. From e-commerce perspective, online cells of batteries in the latest few weeks grew 37% and then latest 13 weeks, it grew 47%. What you’re seeing now is online sales in the category are roughly 8% in track channels and 6% if you factor in untracked channels.

Energizer over that time period 52% in the latest in two weeks and 70 in the latest 13, and then your question in terms of private label, so Amazon basic grew 71% a latest 52 weeks in 95% in the latest 13. What you're really seeing the resulting share numbers, so again Energizer continues to gain share in the latest 13 weeks or up to 20.3 and we’re branded cheerleader online.

And then what you’re really seeing also the dynamic of both channel and brand shifting within the category you’re seeing again, as we’ve talked about in the past, some private label, bricks-and-mortar migrate into online, and you’re also seeing a consolation of those tertiary value brands, which are really consolidating into some private label brands like Basics. And so there is a lot of moving pieces within that – within those channels. But that kind of gives you the lay of the land from an e-commerce perspective.

[Jason Gere, KeyBanc Capital Markets]

And then as you look at the non-tracked, we did relatively well in the home centered DIY sector as well which is not measured. So outside of the track channels we did relatively well. From a competitive landscape, I think what I can tell you from personally walking stores; we were very comfortable, we were heading into the quarter and very pleased with the execution. We stop both in-store and online. When you think about promotional activity in the quarter, which is always a key question for battery category.

During the most current quarter in the U.S. the percent of sales on promotion was up 2.9%, but that was driven primarily by full price displays and that something you typically see in the battery category that you don't see in other categories. Now with that the depth of promotion was actually down versus the prior year slightly. And AUPs for the battery category increased in the U.S. during that same period, up almost 4%. So the way to think about the category you saw a lot of off-shelf full-price display that drove a lot of the category improvement that you would have seen during the quarter outside of the hurricane.

[Jason Gere, KeyBanc Capital Markets]

Okay. And then, the second question and I know you’ve talked on this before, but regarding the Spectrum deal what makes you think you can get this approved, you obviously know the hurdles, investors are concerned about that. Can you hold our hand just a little bit and there’s going to be something that you know that we don't, so I’m just kind of wondering if there's anything else you could say that could a maybe appease investors out there that are little bit concern about the antitrust without obviously saying too much? Thanks.

[Mark LaVigne, Chief Operating Officer.]

It’s Mark. I wish I could hold there. We could hold everyone’s hands a lot more than we really can on this. I think from an overall perspective we spend a lot of time analyzing this transaction. We got a lot of outside advisors who provided opinions on whether we could get this deal through. And obviously we feel good about what we heard. We feel good about engaging with the regulators on the story we have tell. We do expect to close the transaction. We do understand that’s the complicated analysis that we need to engage in and as a result, that’s why the time period elongated than what you would typically see in a transaction on the nine to 12 month.

That’s really all we can say at this point as we wouldn’t assign the contract or put the breakup fee in there if we didn't have a high degree of confidence that we’re going to be able to get the deal through by the end of the year.

[Operator]

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

[William Reuter, Bank of America Merrill Lynch]

Good morning, guys. One question on Amazon Basics, thank you for the color you just provided there in terms of e-commerce growth broadly, and on Amazon's growth. But can you talk about where you expect that Amazon Basics could get to in terms of market share? Or I guess where you believe that private label in general over the next handful of years might be moving towards? What are the trends going to be?

[Tim Gorman, Chief Financial Officer.]

I would say – I mean, right now you’re seeing very healthy growth rates online and in many categories. And what I would say is, you’re seeing some moderation in some categories. You see some growth in those growth rates in others. What we’re focused on is ensuring we have the organization that’s prepare to grow as fast as he grows, and we want to be positioned for that regardless of what happened. So I don't want to get caught up in terms of internally in the organization trying to guess where it’s going to go. I just want to be prepared to make sure we’re there to succeed when it does.

And so, from an overall perspective it’s difficult to predict. From a private-label perspective, again, there's a lot of moving pieces and that you're seeing in the overall trend again globally private label is flat roughly and even down a little bit. So in the latest 52 global is 18.3 of the category and then the latest 13 and 17.7. So you’re not seeing a seismic shift in the overall category now. I want to caveat that because it changes dramatically market to market. In the U.S. you’re roughly at 12. And that has stayed roughly consistent. And then in markets like Germany you had 56 shares. So it really does change depending upon where you are in the world. But in the aggregate we don't see seismic shifts. What you're seeing is the migration of value brands and certain other private labels into the online channel. And so there's that channel and brand shifting is going on and which is why you're seeing the healthy growth rates that you're seeing out of Amazon as well as Basics.

[William Reuter, Bank of America Merrill Lynch]

That’s helpful. And then in terms of your investments and continuous improvements, are those all included in the acquisition and integration costs in terms of your one-time items? Or are there some that you guys have not been calling out that actually would be one-time in nature and we should probably think about that as being an opportunity for next year?

[Tim Gorman, Chief Financial Officer.]

Actually they're not included in the acquisition and integration numbers that were called out. Those are specifically related to the Spectrum deal. We did we did include in our outlook and are embedded within our numbers and not call out as unusual items. The investments we’re making both in our manufacturing footprint and as well as the investments we’re making to improve our global streamliner organization and our business processes. So those numbers are reflected and we can call those out in the script, so we call out $9 million in G&A and another $2 million in COGS in the first quarter and we call out an additional $2 million for each of the next three quarters and G&A and roughly another $2 million to $3 million in COGS in the second and third quarters – in the second quarter.

So those numbers are embedded within the outlook. Obviously they're driving improvements in SG&A and our COGS going forward we’ll see the benefits relative SG&A in the back half of this year, so that does provide kind of a run rate going into fiscal year 2019, likewise with the manufacturing footprint optimization, we don't see a significant benefit of that this year, it really start out in fiscal year 2019.So it sets us up well as move forward.

[Operator]

Our next question comes from Carla Casella with JP Morgan. Please go ahead.

[Carla Casella, JP Morgan]

Hi. I’m wondering if you can comment on Toys"R"Us' bankruptcy and whether that has any impact on your business.

[Alan Hoskins, Chief Executive Officer.]

Yes. Hi. Its Alan. No, it has no impact on our business as its not a customer that is in within our top tier customer grouping and scale, so no impact.

[Carla Casella, JP Morgan]

And then when you look at your top tier customers, how do your top five vary or differ from Spectrum brands in terms of either scope or the type of retailer?

[Alan Hoskins, Chief Executive Officer.]

Yes. So our top-five are around 25% of our total revenue. And then, the breakdown for that, Mark, if you want to jump in?

[Mark LaVigne, Chief Operating Officer.]

So, from an overall perspective we don’t then that’s the breakdown that so you from an overall and we don't talk specific customers. I mean, from a Spectrum perspective, obviously right now we’re in the interim and so as we talked earlier on the call we really need to proceed with our business as it stands now and when and if were able to close the transaction with Spectrum we’re going to make sure that we’re well-positioned to serve all of our customers including the top five of both and even better way because such a reminder on that transaction what it really does is it adds a great value brand to our portfolio. It adds hearing aid. It adds production capacity. So from an overall perspective our ability to continue to serve customers and consumers is only going to be in hands when we’re able to put our customer base and their customer base together.

[Operator]

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

[Olivia Tong, Bank of America Merrill Lynch]

Thanks. Sorry, I got on little late. But wanted to get a bit of clarification first, on Q2 when you said down 10 to 15 and expecting to be at the upper end of the range, you mean at 10 end or the 15 end?

[Alan Hoskins, Chief Executive Officer.]

15 end.

[Olivia Tong, Bank of America Merrill Lynch]

Okay. Got it. And then just bigger picture, historically, batteries obviously hasn't been one of the fastest-growing categories in HPC, yet you guys seem to be bucking a lot of challenging trends that we’re seeing across staples. You're getting positive pricing. Your gross margin expansion expectations have improved. So I guess just bigger picture, why you think that that’s a case? Why do you think retailers and consumers seem to be more receptive to your increases and that’s happening in the vast majority of consumer categories?

[Alan Hoskins, Chief Executive Officer.]

Yes. Olivia, it’s Alan. Good morning. And so part of it is the category dynamics. So think about purchase frequency, it’s prompt to purchase. It’s reliant on multi-siding displays in the store. It's really a category build for driving availability and visibility. It's much different than many other categories in terms of the purchase frequency, typically you'll find batteries in anywhere from five to 10 different locations in the store. It is a basket builder for the retailer. Matter-of-fact retailer baskets almost 2 times improved in value when batteries are in the basket than when they're not and the retailers understand that.

The opportunity that we have is again if you go back to some of the device trends that we’re seeing, it's actually helped in terms of bringing greater awareness to the category, an increase in mix shift from where the category was to both premium and specialty is certainly helping sales. We’re seeing things different regionally around the world, and the U.S. and Europe is an example in the most current year pricing is certainly helping in those markets.

You’ve got new entrance in other markets that create a bit of hiccup as regional players respond to their EDLP strategies there, but that certainly can be overcome. I think for us the big change when we spun off from Edgewell, we brought a very clear focus to the organization. We tried not to over complicated and while it may not be super glitzy and [Indiscernible]. It works exceptionally well in this category. And that is really focusing on core category fundamentals. We need to do that. We had to bring a very clear plan of innovation which is what we’re able to do with our cycle plan of innovation. Its created news in the category and candidly brought excitement back that a category was more focused on renting share through promotion.

We basically said we don't want rented share. We want to grow our base share and we do that through innovation. I think the things that we did differently as well as we took a very clear focus early on back in 2013 when we said, we’ve got to change the way we operate. As you know we went through a significant restructuring. We thought about working capital different. And then we learn from that and reapply a lot of what we still had to do when we did the separation from Edgewell. That’s been embedded in our cultural organizationally.

There’s a continuous improvement mindset of always doing what we do better and really driving that productivity improvement through innovation. And a lot of what happens now is ground up from colleagues to the management to say, we need to address these things to be even better. So I would argue, it's a culmination of things that occurred. Some of them well time, some of them well planned. Some of them had just a lot of grit and hard work by our teams.

The other thing that we have done that candidly is always been at our core, but we get a little off track of free restructuring was how good of a team we are in execution, whether it be in-store or online. All of us including the management team walk stores regularly. And its really important to understand the dynamics of what's happening and not happening in the category. And then finally, I'd say focus. When we separated from Edgewell we went from myself included when I ran Asia and the Middle East and Africa having a really a full portfolio of products and brand you had to managed with the separation we’re able to really focus back on the battery category, the core, and that’s why when we talk about capital allocation and reinvesting in our core to strengthen the long-term it remains a priority.

We understand the importance of it. We understand what it does in terms of focus, and allows us to innovate back in our brands and our products. And that's important to both consumers and customers. So when you look at how we’ve created value and able to take pricing, doing the things that we’re doing a lot of it stems back to having that story for the trade to get them excited about the category and candidly, it has to meet that strategic imperative of consumers which is long-lasting performance. So again, I think there’s a combination of things over the past several years we've done well, that will remain our focus going forward.

The things that I love about the acquisition is it plays to our strength, our wheelhouse. We’re really good in optimizing companies and we believe that the advantages we get from a broader portfolio you know the fact that we’re going to be able to leverage a much broader base of R&D and innovation. What it allows us to do from an manufacturing footprint standpoint and certainly expanded the channels we are good today, while we have the potential to really expand the breadth of our portfolio to reach consumers is really exciting for us. So all in I’d say those were probably the key differences.

[Operator]

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

[Alan Hoskins, Chief Executive Officer.]

Yes I’d like to thank our audience for joining us on the call today and for your continued interest in Energizer. Thank you. Operator that concludes the call.

[Operator]

The conference is now concluded. Thank you very much for attending today’s presentation. You may now disconnect.